The Impact of Illiquidity Risk for the Nordic Markets

Forthcoming in Spanish Journal of Finance and Accounting

26 Pages Posted: 5 Dec 2018

See all articles by Hilal Anwar Butt

Hilal Anwar Butt

University of Karachi - Institute of Business Administration (IBA), Karachi

Kenneth Högholm

Hanken School of Economics - Department of Finance and Statistics

Date Written: November 27, 2018

Abstract

In this study we propose a new measure of illiquidity for small, open stock markets; dollar zero-returns. Compared with other commonly used measures of illiquidity, the dollar zero-return produces the highest anomalous return across all four Nordic markets. In testing the pricing implication of the proxies of illiquidity, we use Acharya and Pedersen’s (2005) liquidity adjusted capital asset pricing model (LCAPM) and nests the Liu (2006) model for a panel of twenty-five size related portfolios for the Nordic markets. Our results show that the only illiquidity measure that gives a significant positive effect across all Nordic markets is the dollar zero-return. Our results also show that the illiquidity mimicking portfolio factor, constructed through dollar zero-return, is the only factor showing a significant premium across different specifications, and its pricing remain significant also when the effect of the level of illiquidity (constructed through all measure of illiquidity) and of size is netted out.

Keywords: market-wide illiquidity, return spread, market model

JEL Classification: G11, G12, G15

Suggested Citation

Butt, Hilal Anwar and Högholm, Kenneth, The Impact of Illiquidity Risk for the Nordic Markets (November 27, 2018). Forthcoming in Spanish Journal of Finance and Accounting, Available at SSRN: https://ssrn.com/abstract=3291210

Hilal Anwar Butt (Contact Author)

University of Karachi - Institute of Business Administration (IBA), Karachi ( email )

University Road
Karachi, Sindh 75270
Pakistan

Kenneth Högholm

Hanken School of Economics - Department of Finance and Statistics ( email )

P.O. Box 287
FIN-65101 Vasa
Finland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
20
Abstract Views
224
PlumX Metrics