On the role of liquidity in emerging markets stock prices

Michael Donadelli and Lorenzo Prosperi

Research in Economics, 2012, vol. 66, issue 4, 320-348

Abstract: This paper investigates the impact of liquidity on emerging markets' stock prices. Particular attention is given to the estimation of Jensen's alpha and the quantity of risk. Our empirical analysis gives rise to two main issues. The first is related to the presence of an extra premium, i.e. “alpha puzzle”. The second is the time-varying component of the quantity of risk, i.e. “beta puzzle”. We find that local liquidity factors do not explain the presence of positive and statistically significant alphas. This puzzle is solved by means of transaction costs. In addition, we show that global liquidity factors, such as VIX and Open Interest, statistically affect the market price of risk. Our empirical finding proves the time varying nature of the global risk factors. Finally, we argue that standard asset pricing models cannot solve the two puzzles simultaneously.

Keywords: Excess returns; Emerging stock markets; Global risk factors; Liquidity (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:66:y:2012:i:4:p:320-348

DOI: 10.1016/j.rie.2012.06.001

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