Liquidity and Expected Returns: Lessons From Emerging Markets

Geert Bekaert, Campbell Harvey () and Christian Lundblad

No 11413, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Given the cross-sectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find that our liquidity measures significantly predict future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with contemporaneous return shocks and negatively correlated with shocks to the dividend yield. We consider a simple asset pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and periods. Our results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not eliminated its impact.

JEL-codes: F02 F30 F36 G12 G14 G15 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-fin and nep-rmg
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2007. "Liquidity and Expected Returns: Lessons from Emerging Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 20(6), pages 1783-1831, November.

Downloads: (external link)
http://www.nber.org/papers/w11413.pdf (application/pdf)

Related works:
Journal Article: Liquidity and Expected Returns: Lessons from Emerging Markets (2007)
Working Paper: Liquidity and Expected Returns: Lessons from Emerging Markets (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:11413

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w11413

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().