The role of an illiquidity risk factor in asset pricing: Empirical evidence from the Spanish stock market

Purpose The aim of this paper is to examine the role of liquidity in asset pricing in a tiny market, such as the Portuguese. The unique setting of the Lisbon Stock Exchange with regards to changes in classification from an emerging to a developed stock market, allows an original answer to whether changes in the development of the market affect the role of liquidity in asset pricing. Design/methodology/approach The authors propose and compare two alternative implications of liquidity in asset pricing: as a desirable characteristic of stocks and as a source of systematic risk. In contrast to prior research for major stock markets, they use the proportion of zero returns which is an appropriated measure of liquidity in tiny markets and propose the separated effects of illiquidity in a capital asset pricing model framework over the whole sample period as well as in two sub-samples, depending on the change in classification of the Portuguese market, from an emerging to a developed one. Findings The overall results of the study show that individual illiquidity affects Portuguese stock returns. However, in contrast to previous evidence from other markets, they show that the most traded stocks (hence the most liquid stocks) exhibit larger returns. In addition, they show that the illiquidity effects on stock returns were higher and more significant in the period from January 1988 to November 1997, during which the Portuguese stock market was still an emerging market. Research limitations/implications These findings are relevant for investors when they make their investment decisions and for market regulators because they reflect the need of improving the competitiveness of the Portuguese stock market. Additionally, these findings are a challenge for academics because they exhibit the need for providing alternative theories for tiny markets such as the Portuguese one. Practical implications The results have important implications for individual and institutional investors who can take into account the peculiar effect of liquidity in stock returns to make proper investment decision. Originality/value The Portuguese market provides a natural experimental area to analyse the role of liquidity in asset pricing, because it is a tiny market and during the period studied it changed from an emerging to a developed stock market. Moreover, the authors have to highlight that previous evidence almost exclusively focuses on the US and major European stock markets, whereas studies for the Portuguese one are scarce. In this context, the study provides an alternative methodological approach with results that differ from those theoretically expected. Thus, these findings are a challenge for academics and open a theoretical and a practical debate.

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Asset growth and stock return: evidence in the Brazilian market

Revista Contabilidade & Finanças ◽

10.1590/1808-057x201805080 ◽

2018 ◽

Vol 29 (78) ◽

pp. 418-434

Author(s):

Márcio André Veras Machado ◽

Robert William Faff

Keyword(s):

Risk Factor ◽

Asset Pricing ◽

Stock Market ◽

Stock Returns ◽

Stock Return ◽

Operating Performance ◽

Growth Effect ◽

Capital Investments ◽

Limits To Arbitrage ◽

Asset Growth

Abstract Empirical evidence suggests that firms which have experienced fast growth, through increased external funding and by making capital investments and acquisitions, tend to show bad operating performance and lower stock returns, whereas firms that have experienced contraction, through divestiture, share repurchase and debt retirement, tend to show good operating performance and higher stock returns. So, this study aimed to analyze the relationship between asset growth and stock return in the Brazilian stock market, and it tested the hypothesis that asset growth is negatively related to future stock return. To do this, the methodology was divided into 3 steps: verifying 1) if asset growth anomaly exists; 2) if this relation may be explained by the investment friction hypothesis and/or by the limits-to-arbitrage hypothesis; and 3) if asset growth is a risk factor or mispricing. In addition, the analysis was carried out both at a portfolio level and an individual assets level. The sample included all the non-financial firms listed at B3 from June 1997 to June 2014. As for the main results, this study found that the asset growth effect exists, both at the portfolio level and the individual assets level, although it is sensitive to the proxy. About the effect’s materiality, this study concluded that the asset growth effect is not economically relevant, since it is not observed in big firms, regardless of the proxy used, a fact that makes it difficult to explore this effect. Another finding is that the asset growth effect may not be related to the limits-to-arbitrage hypothesis and to the financial constraint hypothesis; also, this effect may be considered a risk factor, suggesting that the investment effect documented in the Brazilian stock market may be explained by the rational asset pricing perspective. Therefore, capital market professionals should take into account the asset growth factor in asset pricing models for better investment risk assessment.

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Asset Pricing with Higher Moments: Empirical Evidence from the Taiwan Stock Market

Advances in Quantitative Analysis of Finance & Accounting - Advances in Quantitative Analysis of Finance and Accounting ◽

10.1142/9789812701213_0009 ◽

2005 ◽

pp. 153-170

Author(s):

Bing-Huei Lin ◽

Jerry M. C. Wang

Keyword(s):

Asset Pricing ◽

Stock Market ◽

Empirical Evidence ◽

Higher Moments

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Market's Reaction to Analytical Information From Brokerage Institutions: Empirical Evidence From Stock Market in Vietnam

Research in World Economy ◽

10.5430/rwe.v12n1p189 ◽

2021 ◽

Vol 12 (1) ◽

pp. 189

Author(s):

Van Huy Bui ◽

Van Manh Ha Nguyen ◽

Dang Thanh Minh Tran ◽

Bich Loc Tram ◽

Gia Quyen Phan ◽

...

Keyword(s):

Stock Market ◽

Empirical Evidence ◽

Significant Role ◽

Rate Of Return ◽

Positive Bias ◽

Analytical Information ◽

Study Results ◽

Abnormal Rate ◽

Stock Analysts

This paper examines the market’s reaction to brokerages’ recommendations on the Vietnamese stock market. The results indicate that stock analysts tend to show a drastically positive bias, with the overwhelming number of optimistic recommendations compared to negative ones. The abnormal rate of return following upscaling recommendations is positive, incremental, and statistically significant from the offered moment to a month later, which is consistent with results from different measures of the standard portfolio. However, the study has not found cogent evidence of the market reaction to downgrading recommendations. This research emphasizes the significant role of analytical information on the stock market in Vietnam, and the implications are discussed based on this study’s findings. The study results are the foundation for investors’ considerations about brokerages’ proposals before their trades.

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