Abstract
Using data from 16 developing countries and 10 developed countries between January 2000 and December 2013, this study examines the relationship between liquidity and stock index return. The empirical results show that the higher market liquidity (trading volume, turnover ratio, and turnover volatility), the higher stock index return in developing countries. Conversely, the market liquidity (trading volume, turnover ratio, turnover volatility) corresponds negatively with return in the developed countries. During the crisis, however, the relationship between market liquidity and return show mixed results. While trading volume and turnover stays positive, yet the other liquidity measures become insignificant. In particular, for developed countries, only Amihud significantly affects return. Our results are robust even after controlling dividend yield, exchange rate, and regional stock market beta.
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