Stock Liquidity and Return Predictability; Is There a Connec-tion? (Evidence from an Emerging Market)

Subject Areas : Financial Accounting

Mojtaba Alifamian ¹ , Ali Eshaghzade ² , Abdolkarim Maleknia ³

1 - Department of Accounting, Allameh Tabatabai University, Tehran, Iran
2 - Department of Finance, Petroleum University of Technology, Tehran, Iran
3 - Department of Accounting, Allameh Tabatabai University, Tehran, Iran

Received: 2022-04-28 Accepted : 2022-09-05 Published : 2023-07-01

Keywords: Tehran Stock Exchange, Return Predictability, Liquidity, spread, market efficiency,

Abstract :

This study examines the relationship between stock liquidity and return predicta-bility of 116 publicly-traded firms in Tehran Stock Exchange (TSE). To this end, we constructed a dated-regular frequency of time series with total 40128 stock-firm observations. After calculating daily bid-ask spreads and stock returns, the observations were classified based on liquidity into three classes and the return predictability was investigated across different classes using a set of parametric tests. The results exhibit signs of return autocorrelation and non-independence over three liquidity groups. Our findings didn’t show a connection between stock liquidity and market efficiency. The Hurst exponent also revealed mean reversion of returns series across different liquidity classes. We conclude that stock liquidity doesn’t play a significant role in market efficiency and return predictability of stocks in TSE. In case of TSE as other emerging markets, due to the small num-ber of traders (the need for more trading activity) and low market making activi-ties, both the cost of trading increases and the reaction to stock price information is delayed, resulting in predictability of price /return.

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