Flight-to-Liquidity and Excess Stock Return: Empirical Evidence from a Dynamic Panel Model

Asif Ali, Habib Ur Rahman, Adam Arian and John Sands ()
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Asif Ali: Department of Business Studies, Pakistan Institute of Development Economics, Islamabad 44000, Pakistan
Habib Ur Rahman: Faculty of Higher Education (Accounting and Finance), Holmes Institute, Gold Coast, QLD 4217, Australia
Adam Arian: School of Business, Faculty of Business, Education, Law and Arts, University of Southern Queensland, Darling Heights, QLD 4350, Australia
John Sands: School of Business, Faculty of Business, Education, Law and Arts, University of Southern Queensland, Darling Heights, QLD 4350, Australia

JRFM, 2023, vol. 16, issue 12, 1-16

Abstract: This study examines the impact of the flight-to-liquidity (FTL) phenomenon on the excess stock return by applying the previously developed generalised method of moments (GMM) framework. For this purpose, we use the data covering the period from 2004 to 2018 for 122 public companies listed on the Pakistan Stock Exchange (PSX). This study uses six proxies to measure the expected and unexpected illiquidity. The empirical investigation reveals that expected and unexpected illiquidities greatly influence smaller firms more notably than larger ones, which induces FTL phenomena into the market. Moreover, a FTL phenomenon triggered the Pakistani equity market during the financial crisis, when a significant decline appeared and the less liquid stocks were strongly affected. The results reveal that FTL risk is priced in the Pakistan equity market, making large stocks relatively more attractive in times of dire liquidity. These findings further suggest that the market participants in the Pakistan equity market, including policymakers, regulators and investors, should not ignore FTL phenomena while designing their portfolios.

Keywords: flight-to-liquidity; stock return; financial crisis; Pakistani equity market; investors (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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