Abstract

http://ssrn.com/abstract=1151569
 
 

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Liquidity and Expected Returns: Lessons from Emerging Markets


Geert Bekaert


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Campbell R. Harvey


Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Christian T. Lundblad


University of North Carolina Kenan-Flagler Business School

November 2007

The Review of Financial Studies, Vol. 20, Issue 6, pp. 1783-1831, 2007

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 it significantly predicts 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 time 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 fully eliminated its impact.

Keywords: G12, G15, F30

Accepted Paper Series


Not Available For Download

Date posted: June 26, 2008  

Suggested Citation

Bekaert, Geert and Harvey, Campbell R. and Lundblad, Christian T., Liquidity and Expected Returns: Lessons from Emerging Markets (November 2007). The Review of Financial Studies, Vol. 20, Issue 6, pp. 1783-1831, 2007. Available at SSRN: http://ssrn.com/abstract=1151569 or http://dx.doi.org/10.1093/rfs/hhm030

Contact Information

Geert Bekaert (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Campbell R. Harvey
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Christian T. Lundblad
University of North Carolina Kenan-Flagler Business School ( email )
Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

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