Liquidity and Equity Returns in Borsa Istanbul

Abstract

We investigate the relationship between expected returns and liquidity measures in Borsa Istanbul. To do so, we gather a wide range of illiquidity measures that can be applied to the market. Firm-level cross-sectional regressions indicate that there is a positive relationship between various illiquidity measures and one-month to six-month ahead stock returns. Findings of the paper are robust after using different sample periods and controlling for well-known priced factors such as market beta, size, book-to-market and momentum. The portfolio analysis reveals that stocks that are in the highest illiquidity quintile earn 7.2% to 19.2% higher annual returns than those in the lowest illiquidity quintile.

Keywords: liquidity, emerging markets, equity returns, asset pricing

JEL Classification: G10, G11, G12