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

محورهای موضوعی : Financial Accounting

Mojtaba Alifamian ¹ (Department of Accounting, Allameh Tabatabai University, Tehran, Iran)
Ali Eshaghzade ² (Department of Finance, Petroleum University of Technology, Tehran, Iran)
Abdolkarim Maleknia ³ (Department of Accounting, Allameh Tabatabai University, Tehran, Iran)

تاریخ دریافت : 1401/02/08 تاریخ پذیرش : 1401/06/14 تاریخ انتشار : 1402/04/10

کلید واژه: Tehran Stock Exchange, Return Predictability, Liquidity, spread, market efficiency,

چکیده مقاله :

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.

منابع و مأخذ:

[1] Acharya, VV., Pedersen, LH., Asset pricing with liquidity risk, Journal of financial Economics, 2005, 77(2), P.375-410. Doi:10.1016/j.jfineco.2004.06.007

 

[2] Ahadi Sarkani, U., Ghasempour, M., Evaluation the Effects of Monetary and Fiscal Policy and Iindustry Growth on Changes of Tehran Security Exchange Index, Journal of Investment Knowledge, 2017, 6(22), P.49-64. (In Persian).

 

[3] Amihud, Y., Mendelson, H., Asset pricing and the bid-ask spread, Journal of financial Economics, 1986, 17(2), P. 223-49. Doi:10.1016/0304-405X(86)90065-6

 

[4] Bahar Moghaddam, M., Hosseini Nasab, H., Raisi, H., Effect of Stock Liquidity on Stock Price Informativeness and Accruals-Based Earnings Management in Companies Listed in Tehran Stock Exchange, Financial Accounting Research, 2016, 7(4), P.39-56. (In Persian).

 

[5] Baker, M., Stein, JC., Wurgler, J., When does the market matter? Stock prices and the investment of equity-dependent firms, The quarterly journal of economics, 2003, 118(3), P.969-1005.  Doi:10.1162/00335530360698478

 

[6] Bartels, R., The rank version of von Neumann's ratio test for randomness, Journal of the American Statistical Association,1982, 77(377), P.6-40. Doi:10.2307/2287767

 

[7] Boehmer, E., Jones, CM., Zhang, X., Which shorts are informed? The Journal of Finance, 2008, 63(2), P.491-527. Doi:10.1111/j.1540-6261.2008.01324.x

 

[8] Bond, P., Edmans, A., Goldstein, I. The real effects of financial markets, Annu. Rev. Financ. Econ, 2012, 4(1), P.339-360.  Doi:10.2139/ssrn.1976347.

 

[9] Brock, WA., Dechert, WD., Non-linear dynamical systems: instability and chaos in economics, Handbook of mathematical economics, 1991, 4(1), P.2209-2235 Doi:10.1016/S1573-4382(05)80015-3

 

[10] Brogaard, J., Li, D., Xia, Y., Stock liquidity and default risk, Journal of Financial Economics, 2017, 124(3), P.486-502. Doi: 10.1016/j.jfineco.2017.03.003

 

[11] Cajueiro, DO., Tabak, BM., The Hurst exponent over time: testing the assertion that emerging markets are becoming more efficient, Physica A: statistical mechanics and its applications, 2004, 336(3), P.521-537.  Doi:10.1016/j.physa.2003.12.031

 

[12] Carbone, A., Castelli, G., Stanley, HE., Time-dependent Hurst exponent in financial time series, Physica A, Statistical Mechanics and its Applications, 2004, 344(2), P.267-271.  Doi:10.1016/j.physa.2004.06.130

 

[13] Chordia, T., Roll, R., Subrahmanyam, A., Liquidity and market efficiency, Journal of financial Economics, 2008, 87(2), P.249-268.  Doi:10.1016/j.jfineco.2007.03.005

 

[14] Christiansen, C., Mean reversion in US and international short rates,The North American Journal of Economics and Finance, 2010, 21(3), P.286-296.  Doi:10.1016/j.najef.2009.08.002

[15] Cooper, SK., Groth, JC., Avera, WE. Liquidity, exchange listing, and common stock performance, Journal of Economics and Business, 1985, 37(1), P.19-33.  Doi:10.1016/0148-6195(85)90003-7

 

[16] Edmans, A., Blockholder trading, market efficiency, and managerial myopia, The Journal of Finance. 2009, 64(6), P. 2481-2513.  Doi:10.1111/j.1540-6261.2009.01508.x

 

[17] Erza, A., Seifi, F., The Impact of Financial Risk on the Efficiency in the Tehran Stock Exchange Companies,Financial Knowledge of Securities Analysis, 2020, 13(45), P. 1-13. (In Persian)

 

[18] Fama, EF., French, KR., Financing decisions: who issues stock? Journal of financial economics. 2005, 76(3), P.549-582. Doi: 10.1016/j.jfineco.2004.10.003

 

[19] Fama, EF., Efficient capital markets: A review of theory and empirical work, The journal of Finance. 1970, 25(2), P.383-417.  Doi:10.2307/2325486

 

[20] Fama, EF., Efficient market hypothesis, Diss. PhD Thesis, Ph. D. dissertation, 1960.

 

[21] Fama, EF., The behavior of stock-market prices, The journal of Business, 1965, 38(1), P.105-134.

 

[22] Fang, J., Stock liquidity, price informativeness, and accruals-based earnings management, 2012.

 

[23] Farshadfar, Z., Prokopczuk. M., Improving Stock Return Forecasting by Deep Learning Algorithm, Advances in Mathematical Finance and Applications, 2019, 1, 4(3), P.1-13.

Doi: 10.22034/AMFA.2019.584494.1173

 

[24] Farshadfar, Z., Khalili Eraghi, M., Study the Effect of Stock Liquidity on Excess Return with Five Factors Arbitrage Pricing Model, Financial Knowledge of Securities Analysis, 2016, 9(29), P.97-109. (In Persian)

 

[25] Gerken, WC., Blockholder ownership and corporate control: the role of liquidity, The Quarterly Journal of Finance. 2014, 4(01):1450003.  Doi:10.1142/S2010139214500037

 

[26] Ghojavand, S., Ghojavand, Z., Hashemi, A., Effect of Different Levels of Liquidity Measures on the Premium Stock Returns Using the Four-Factor Model of Fama and French, Journal of Asset Management and Financing, 2013, 1(2), P.69-86. (In Persian).

 

[27] Gholami, R., Narrei B., Azizi, P., Effects of Turnover on Stock Price Delay in Companies Listed in Tehran Stock Exchange, Journal of Accounting Knowledge, 2019, 10(3), P.33-67. (In Persian).

 

[28] Glosten, LR., Milgrom, PR. Bid, ask and transaction prices in a specialist market with heterogeneously informed traders, Journal of financial economics. 1985, 14(1), P.71-100.  Doi:10.1016/0304-405X(85)90044-3

 

[29] Grossman, SJ., Stiglitz, JE. On the impossibility of informationally efficient markets, The American economic review, 1980, 70(3), P.393-408.

 

[30] Hasani, M., Nabizadeh, N., Evidence of the effect of illiquidity of stocks on the expected returns of stocks, 2016. (In Persian).

 

[31] Hayek, FA., The use of knowledge in society, The American economic review, 1945, 35(4), P.519-530.

 

[32] Hirshleifer, D., Teoh, SH., Yu, JJ. Short arbitrage, return asymmetry, and the accrual anomaly, The Review of Financial Studies, 2011, 24(7), P.2429-2461.  Doi:10.1093/rfs/hhr012

 

[33] Holden, CW., Jacobsen, SE., Subrahmanyam, A., The empirical analysis of liquidity, Foundations and Trends in Finance, 2014, 8(1), P.263-365.  Doi:10.2139/ssrn.2402215

 

[34] Holmström, B., Tirole, J., Market liquidity and performance monitoring, Journal of Political economy, 1993, 101(4), P.678-709.  Doi:10.1086/261893

 

[35] Hou, K., Moskowitz, TJ., Market frictions, price delay, and the cross-section of expected returns, The Review of Financial Studies, 2005, 18(3), P.981-1020.  Doi:10.1093/rfs/hhi023

 

[36] Huang, S., The momentum gap and return predictability, The Review of Financial Studies, 2022, 3303-3336.  Doi:10.1093/rfs/hhab093

 

[37] Jacoby, G., Fowler, DJ., Gottesman, AA., The capital asset pricing model and the liquidity effect: A theoretical approach, Journal of Financial Markets, 2000, 3(1), P.69-81.  Doi:10.1016/S1386-4181(99)00013-0

 

[38] Kim, JH., Automatic variance ratio test under conditional heteroscedasticity, Finance Research Letters, 2009, 6(3), P.179-185.  Doi:10.1016/j.frl.2009.04.003

 

[39] Lansing, KJ., LeRoy, SF., Ma J. Examining the sources of excess return predictability: Stochastic volatility or market inefficiency? Journal of Economic Behavior & Organization, 2022, P.50-72.

Doi:10.1016/j.jebo.2022.01.028

 

[40] Izadikhah, M., A Fuzzy Goal Programming Based Procedure for Machine Tool Selection, 2015, 28(1), P. 361-372, Doi: 10.3233/IFS-141311

 

[41] Izadikhah, M., Financial Assessment of Banks and Financial Institutes in Stock Exchange by Means of an Enhanced Two stage DEA Model. Advances in Mathematical Finance and Applications, 2021, 6(2), P. 207-232. Doi: 10.22034/amfa.2020.1910507.1491

 

[42] Lipson, ML., Mortal, S., Liquidity and capital structure. Journal of financial markets, 2009, 12(4), P.611-644.  Doi:10.1016/j.finmar.2009.04.002.

 

[43] Liu, W., A liquidity-augmented capital asset pricing model. Journal of financial Economics, 2006, 82(3), P.631-671.  Doi:10.1016/j.jfineco.2005.10.001.

 

[44] Ljung, GM., Box, GE. On a measure of lack of fit in time series models. Biometrika, 1978, 65(2), P.297-303. Doi:10.1093/biomet/65.2.297.

 

[45] Lo, AW., MacKinlay, AC., Stock market prices do not follow random walks: Evidence from a simple specification test, The review of financial studies, 1988, 1(1), P.41-66.  Doi:10.1093/rfs/1.1.41.

 

[46] Luo, Y., Do insiders learn from outsiders? Evidence from mergers and acquisitions, The Journal of Finance,2005, 60(4), P.1951-1982.

 

[47] Ozdenoren, E., Yuan, K. Feedback effects and asset prices, The journal of finance,2008, 63(4), P.1939-1975.  Doi:10.1111/j.1540-6261.2008.01378.x.

 

[48] Pástor, Ľ., Stambaugh, RF. Liquidity risk and expected stock returns, Journal of Political economy, 2003, 111(3), P.642-85.  Doi:10.1086/374184.

 

[49] Piotroski, JD., Value investing: The use of historical financial statement information to separate winners from loser, Journal of Accounting Research, 2000, 1886(13), P.1-41,  Doi:10.1016/S2077-70024-6.

 

[50] Raei, R., Eivazlu, R., Abbaszadeh Asl., A., Investigation on relation between information asymmetry and liquidity via market microstructures model in Tehran Stock Exchange, Financial Knowledge of Securities Analysis, 2017, 10(34), P.13.24. (In Persian)

 

[51] Rahmani, A., Hosseini, S., Rezapour, N., Institutional Ownership and Stock Liquidity: Evidence from Iran, Accounting and Auditing Review, 2010, 17(3), P.39-54. (In Persian)

 

[52] Salehifar, M., Rahnamay Roodposhti, F., Chaharmahali, H., The Application of Ecology Theories in Finance, Journal of Investment Knowledge, 2019, 8(29), P.137-58. (In Persian)

 

[53] Samadi, R., Ezazi, M., Tehrani, R., Roshan, SA., Nabi Shahiki Tash, M. Approach of Maximal overlap discrete wavelet transforms to stock return in the Iran capital market, Advances in Mathematical Finance and Applications, 2022. (In Persian).

 

[54] Sarin, A., Shastri, K., Shastri, K., Ownership structure and stock market liquidity, Available at SSRN 02652.

 

[55] Soheili, K., Amirian, S., Investigating the relationship between liquidity and stock return rate with free floating shares in Tehran Stock Exchange, Macroeconomic Research Journal, 2013, 9(18), P.1-13. (In Persian)

 

[56] Subrahmanyam, A., Titman, S., Feedback from stock prices to cash flows, The Journal of Finance, 2001, 56(6), P.2389-2413.  Doi:10.1111/0022-1082.00409

 

[57] Sun, PW., Wen, Z., Stock return predictability of the cumulative abnormal returns around the earnings announcement date, Evidence from China. International Review of Finance, 2022, Doi:10.1111/irfi.12380

 

[58] Taherinia, M., Rashidi Baghi, M., Prediction the Return Fluctuations with Artificial Neural Networks' Approach, Advances in Mathematical Finance and Applications, 2019, 4(2), P.103-114.

Doi: 10.22034/amfa.2019.580643.1149.

 

[59] Urquhart, A. The inefficiency of Bitcoin. Economics Letters, 2016, 148(1), P.80-82.

 Doi:10.1016/j.econlet.2016.09.019

 

[60] Vassalou, M., Xing, Y., Default risk in equity returns, The journal of finance, 2004, 59(2), P.831-868.  Doi:10.1111/j.1540-6261.2004.00650.x

 

[61] Wang, WC., Liquidity and market efficiency in cryptocurrencies, Economics, Letters, 2018, 168(1), P.21-24. Doi:10.1016/j.econlet.2018.04.003

 

[62] Wen, Z., Bouri, E., Xu, Y., Zhao, Y., Intraday return predictability in the cryptocurrency markets: momentum, reversal, or both, The North American Journal of Economics and Finance, 2022, 8(2), P.101733-48.

Doi: 10.1016/j.najef.2022.101733

 

[63] Wilson, R., Information, efficiency, and the core of an economy. Econometrica, Journal of the Econometric Society, 1978, P.807-16.  Doi:10.2307/1909750

 

[64] Yahyazadeh Far, M., Shams, S., Larimi, S., The Relationship between liquidity and stocks return in Tehran Stock Exchange, Financial Research Journal, 2010, 12(29), P.111-128. (In Persian)

 

[65] Zhang, Y., Tse, T., Zhang, G., Return predictability between industries and the stock market in China, Pacific Economic Review, 2022. Doi:10.1111/1468-0106.12379.

 

[66] Zamani, S., Zanjirdar, M., Lalbar, A. The effect of information disclosure on market reaction with meta-analysis approach, Advances in Mathematical Finance and Applications, 2022, 7(3), P. 629-644.

 Doi: 10.22034/amfa.2021.1937478.1625

[67] Zanjirdar, M., Overview of Portfolio Optimization Models. Advances in Mathematical Finance and Applications, 2020, 5(4), P.419-435. Doi: 10.22034/amfa.2020.674941.

[68] Zanjirdar, M., Kasbi, P., Madahi, Z., Investigating the effect of adjusted DuPont ratio and its componentson investor & quot; s decisions in short and long term, Management Science Letters, 2014, 4(3), P.591-596.

Doi: 10.5267/j.msl.2014.1.003