The Effect of Implicit Market Barriers on Stock Trading and Liquidity
Networks Financial Institute Working Paper 2018-WP-02
46 Pages Posted: 15 Feb 2018
Date Written: January 23, 2018
We compare the performance of Islamic and conventional stock returns in Saudi Arabia in order to determine whether the Saudi market exhibits characteristics that are consistent with segmented markets and investor recognition effects. We sample the daily stock returns of all Saudi firms from September 2002 to 2015 and calculate important measures, including idiosyncratic volatility, market integration, systematic turnover, and stock turnover and liquidity. Integration tests report that Islamic stocks are more sensitive to changes in global and local macroeconomic variables than conventional stocks, supporting the hypothesis that the Islamic and conventional stock markets are segmented in Saudi Arabia. In addition, our results show that Islamic stocks have a broader investor base, lower idiosyncratic risk, higher systematic turnover, and are more liquid than conventional stocks, which support the investor recognition hypothesis. Our results provide new evidence on asset pricing in emerging markets, the evolving Islamic financial markets, and the potential impact of other implicit market barriers on global financial markets.
Keywords: Segmented markets, Islamic finance, Emerging markets, Asset pricing, Investor recognition
JEL Classification: G1, G2, F3, P5
Suggested Citation: Suggested Citation