Moderating Effect of Illiquidity on The Relationship Between Momentum and Equity Returns in The Kenyan Capital Markets

This paper sought to examine the moderating effect of illiquidity on the relationship between momentum and equity returns in the Kenyan capital markets. Previous studies have shown that illiquidity has a time-varying effect on momentum strategies, but little is known whether illiquidity has a moderating effect on the relationship between momentum and equity returns in Kenyan capital markets. A longitudinal research design was used for this study to examine the causal inference. Data comprised of monthly transactions on the 20 equities used in the formulation of the NSE 20 share index over the period between Jan 2009 and up to March 2018 which formed 111 data points. ADF and PP results showed that Returns and momentum are stationary at levels while illiquidity was stationary at first difference. The error correction term was negative and statistically significant with or without the moderator. Results indicate that without a moderator percentage increase in momentum is linked to a 0.0000313% increase in returns in the short run. The study further shows that the effect of momentum on equity returns is moderated by illiquidity using a t-test. R2 changed from 0.427 to 0.4337 indicating a change of 0.006 at 0.05% significant level suggesting that illiquidity moderates the relationship between momentum and equity returns in the Kenyan capital markets.

Short- and long-term effects of responsible investment growth on equity returns

PurposeThe growth of socially responsible assets has been exponential over the last decade, they now account for almost a third of professional investments. As the growth persists, faith and conviction investors reshape the equity markets. To fully comprehend the impact of socially conscious participants on security returns, this paper attempts to provide insights on how responsible investment growth has impacted the returns of sustainable stocks. The examination is split by investment horizon to account for short and long effects.Design/methodology/approachUsing an exclusive dataset of non-financial ratings, provided by MSCI ESG research, the authors examine the cross-sectional returns of US and European sustainability-leading and lagging corporations between 2007 and 2019. Panel models robust to country, firm-year and industry effects were then employed to examine the impact of responsible investment growth on future stock returns.FindingsThe authors find evidence that the impact of responsible investment growth is dual contingent upon the timeframe considered. In the short run, sustainability-leading and lagging firms display similar stock returns. However, the spread in returns is negative over long horizons and increasing over time.Originality/valueThe examination performed in this study highlights the significant effect of responsible investment growth on future stock returns. Overall, the authors’ findings are consistent with the price pressure hypothesis in the short run and the cost of capital alteration over longer horizons.

Illiquidity risk and equity trading performance: A statistical analysis

Subject. The article considers the development of special statistical methods for estimating and analyzing the liquidity risk. Objectives. The purpose is to improve the methodology for statistical appraisal and analysis of risk in equity trading. Methods. The study rests both on well-known methods for equity risk analysis and my own development results (calculation of equity annual illiquidity ratio, formation of illiquidity risk factor). The data analyzed in this paper come from the Moscow Exchange (MOEX) and cover January 2011 to May 2021. The sample included all common stocks traded on MOEX and issuers’ financial statements. I also apply analysis and synthesis, induction and deduction, and methods of comparison and grouping. Results. I calculated monthly illiquidity factor as zero-investment long-short portfolio. I examined the impact of illiquidity risk on the return dynamics of size, book-to-market ratio sorted portfolios. Conclusions. The study shows that expected equity returns are related cross-sectionally to the illiquidity factor. The evidence strongly supports the hypothesis that the illiquidity risk factor is priced. The premium for this risk is positive and offers higher expected returns in equities with strong illiquidity. However, for liquid equities no significant premium is revealed. The offered approach to the factor equity risk analysis based on illiquidity risk enables a true picture of how the risks impact the equity trading performance and how they can be improved in the future.

Do Investment-Based Models Explain Equity Returns? Evidence from Euler Equations

We investigate the empirical implications of the investment-based model of asset pricing for the Hansen-Jagannathan and Kozak-Nagel-Santosh discount factors in the linear span of equity returns. We find that the stochastic discount factors satisfying the Euler equation for equity returns cannot satisfy the Euler equation for investment returns because returns on corporate investment covary inversely with the sources of equity risk relative to returns on equity. As a result, the model fails to replicate the level of the risk premium. Our results suggest that joint restrictions on the optimality of investment and consumption pose stringent conditions for candidate production models.