Abstract
This paper deals with illiquidity measurement of stocks on Croatian Stock market. Illiquidity measures used in this paper are daily ratio of absolute stock return to its dollar volume (ILLIQ) and RCT (Relative change in turnover). Aim of this paper is to show that illiquidity measure RCT makes clear distinction between liquid and illiquid stocks that should be reflected through investment strategy where investment in RCT based illiquid portfolios outperforms investment in ILLIQ based portfolios and CROBEX index. Research was carried out on eighteen stocks from Zagreb Stock Exchange (ZSE) which are constituents of CROBEX index. Portfolios of liquid and portfolios of illiquid stocks based on results of illiquidity measurement were constructed. Behaviour in terms of return and volatility of these portfolios in following one-year period was observed. Results showed that portfolios formed using RCT as measure of illiquidity constantly outperformed CROBEX index and ILLIQ based portfolios. Returns of RCT based portfolios had lower standard deviation and were more stable than ILLIQ based portfolios in whole period. RCT as a measure of illiquidity produces valuable information on stock liquidity that can be exploited as investment strategy reflecting itself in larger expected returns of RCT portfolios in future period than expected returns of ILLIQ based portfolios and market.
Highlights
Illiquidity is proven attribute of stocks, it has strong impact on assets pricing, portfolio selection and risk management
Illiquidity measures used in this paper are daily ratio of absolute stock return to its dollar volume (ILLIQ) and Relative Change in Turnover (RCT) (Relative change in turnover)
Aim of this paper is to show that illiquidity measure RCT makes clear distinction between liquid and illiquid stocks that should be reflected through investment strategy where investment in RCT based illiquid portfolios outperforms investment in ILLIQ based portfolios and CROBEX index
Summary
Illiquidity is proven attribute of stocks, it has strong impact on assets pricing, portfolio selection and risk management. One of the most accepted measures of illiquidity is ILLIQ [1] calculated from data on daily stock returns and volume which can be obtained. ILLIQ is most recognized illiquidity measure but still is not recognized as the all-purpose illiquidity measure for both developed and underdeveloped markets. Another readily available measure is trading volume which is a natural measure of stock liquidity. Some authors argue that expected return in developed markets is a function of volatility [3], while others argue a positive relation between volatility and market thinness or illiquidity [4] and [5]
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