Liquidity Proxies Research Articles

Liquidity, asset quality, and efficiency to sustainable growth rate for banking at Indonesia Stock Exchange

The focus of the bank to increase profit. However, the increase in profit is not important to focus on because the sustainability of growth is more important. Measure the level of sustainable growth is an important factor that needs attention as a reflection for the performance of a bank. The measurement uses the concept of growth called the Sustainable Growth Rate (SGR). This study aims to provide empirical evidence on the effect of liquidity proxy Loan to Funding Ratio (LFR), asset quality proxy by Non-Performing Loan (NPL) and efficiency proxy by Operating Cost to Operating Income (BOPO) toward SGR. The sampling technique is purposive based on the criteria so that the selected 22 banks with the study period 2012-2107. Unit analysis as much as 132 observations. The analysis of data using panel data regression. The findings of the study showed that LFR, NPL, and BOPO had a significant negative effect on SGR. The implications of research that SGR becomes important as it relates to the bank's strategy to continue to grow and continue in order to expand its business maximally while maintaining internal and external funding sources. JEL Classification : G2, G21 DOI: https://doi.org/10.26905/jkdp.v23i2.2699

Market reactions to changes in the Dow Jones industrial average index

Purpose The purpose of this paper is to examine changes in stock returns, liquidity, institutional ownership, analyst following and investor awareness for companies added to and deleted from the Dow Jones Industrial Average (DJIA) index. Previous studies report conflicting evidence regarding the market reactions to changes in the DJIA index membership. Design/methodology/approach This study uses the event-study methodology to calculate abnormal returns and trading volume around the announcement and effective days of DJIA index changes from 1929 to 2015. It also tests for significant changes in liquidity, institutional ownership, analyst following and investor awareness in the 1990–2015 period. Multivariate regressions are used to perform a simultaneous analysis of competing hypotheses. Findings This study resolves the mixed results of previous DJIA index papers by documenting different stock price and trading volume reactions over the 1929–2015 period. Focusing on the most recent period, 1990–2015, the study finds that stocks added to (deleted from) the index experience a significant permanent stock price gain (loss). The observed stock price reaction seems to be associated with changes in liquidity proxies thus lending support for the liquidity hypothesis. Research limitations/implications Limited data availability for the periods prior to 1990 prevents this study from identifying the exact reasons for different stock price and trading volume reactions across subperiods of the 1929–2015 period. Originality/value This study provides the most comprehensive examination of market reactions to changes in the DJIA index and resolves the mixed results of previous studies. A better understanding of market reactions around the DJIA index changes can help both individual and institutional investors with developing effective trading strategies and index managing companies with designing optimal announcement policies.

Commonality in Liquidity Indices: The Emerging European Stock Markets

The aim of the paper is to examine commonality in liquidity indices across emerging European stock markets. Five markets are included in the study: Hungarian, Czech, Polish, Russian and Turkish, in the period from 2008 to 2017. We propose liquidity indices that are based on low-frequency liquidity proxies and capture both the dynamics coming from volume and price changes. We find strong commonality of the liquidity indices across all examined markets which is robust to the choice of liquidity proxy. The dependence between indices enhances in times of crisis and large market declines, and weakens when markets become stable. We also examine the interdependency between liquidity and volatility estimates and find that liquidity on the European emerging markets is related to CBOE Volatility Index (VIX). Liquidity in the whole region decreases when VIX increases, and vice versa. The liquidity indices based on the extreme market movements show that there are no differences in commonality in time of extreme negative and positive returns.

Stock Liquidity and Real Economic Activities-Evidence from Karachi Stock Exchange

Stock markets play a significant role for investors and financial institutions and help them to in order to mobilize their finances and provide platform to buy and sell their stock. In any country stock market has a significant effect on the economy as it regulates money and debts. This helps in focusing on the allocation of our investment and resources efficiently. This further enhances the structure of stock market and guide future direction for investment opportunities. Equity market is considered as a source of capital for the investors and financial organizations. The aim of our is to investigate the Karachi stock market liquidity using firm level data describing the real economic activity of the country by controlling equity and non equity factors. For this purpose, alternative liquidity proxies are applied to economic indicators by taking the stock sample from KSE during the tenure of last years (1988-2018). The tools for measuring illiquidity measures Amihud (ILR) and the relative spread (RS) were used whereas Turnover (TUR) and the volume of trading (VTR) are used to measure liquidity. The sample for this study consists of firms’ stocks listed on the Karachi Stock Exchange for calculating the liquidity proxies and real economic activity, daily stocks prices data and returns, total number of shares and trading volume of each company. For measuring real economic activity the macro variables used are: Real GDP (RGDP), Real consumption (RC), Real investment (RI) and the unemployment rate (UnR). Hypotheses were developed according to the objective of the study. Standard linear and nonlinear models for the GDP calculation and regression model for developing the correlation between stock market liquidity and various economic factors. Jarque-Bera test, causality tests were applied to find correlation between stock market liquidity and real economic activity factors. The result of this study suggested that stock market liquidity has a significant effect on real economic activity in Karachi stock exchange market. Keywords: Stock market, liquidity, illiquidity, economic activity, capital, investment, DOI : 10.7176/EJBM/11-10-02 Publication date : April 30 th 2019

Short-Term Reversals and Trading Activity

We find no evidence of monthly return reversals for the top quintile of small- and large-cap stocks ranked by turnover. Indeed, stocks in the top decile of turnover display short-term momentum. We argue these findings arise from a combination of effects. First, short-term reversals stem from short-term liquidity demands. Second, news-driven returns tend to continue rather than reverse. Third, turnover acts as a proxy for both liquidity and news-driven trading activity. The evidence suggests that reversals give way to momentum as turnover increases because high-turnover stocks are more liquid than low-turnover stocks and their returns are more reflective of news-driven trading activity. For example, the correlation between the monthly returns of stocks that announce earnings during the month and their announcement-window returns increases with monthly turnover. Furthermore, sorting stocks into turnover-based portfolios that are rebalanced monthly leads to a disproportionate number of stocks with earnings announcements in the high-turnover portfolios.

Financial liberalization and structural change: the Brazilian case in the 2000s

Abstract This paper discusses the relationship between financial integration and structural change based on a Minsky-Kregel approach. The motivation for this investigation derives from the fact that the opening of the Brazilian economy in the 1990s did not generate a structural change capable of increasing the weight of higher-technological sectors in the manufacturing industry. In theoretical terms we assume that financial liberalization in developing countries induces the loss in importance of the industrial sector in the productive structure, leading to an early deindustrialization process. In addition, it increases the external fragility and reduces the scope for developing countries to implement long-term economic policies to increase their potential output. In our econometric exercise applied to the Brazilian economy in the 2000s it was observed that financial integration and dependence on foreign savings, captured by an international liquidity proxy and dummy variables to incorporate the external financial instability in the period studied, reduced the share of Brazilian industry in GDP.

Credit Rating and Liquidity in the US Corporate Bond Market

This article examines the relationship, commonly assumed by the literature, between credit rating and liquidity. Analyzing sixteen proxies of (il)liquidity encompassed in five dimensions of liquidity from transaction data, the authors observe that credit ratings can be grouped into four blocks based on their liquidity when working with bond-level data. The blocks are AAA/AA and A/BBB for investment-grade bonds, and BB/B and “CCC or lower” for speculative-grade bonds. However, when working with rating-level data, significant differences in liquidity appear between all rating categories. These liquidity differences are not homogeneous when a distinction is made between dimensions of liquidity.

Credit Risk Assessment in Real Estate Investment Trusts: A Perspective on Blockholding and Lending Networks

This study assesses the credit risk of Japan's real estate investment trusts (J-REITs) in two related markets during the fiscal years 2008--2017. The first J-REIT market involves blockholders, while the second is a lending market of institutions (i.e., banks and insurers). Unlike investment trusts, a J-REIT is an investment security issued by an investment corporation and thus has corporate credit risk. Consequently, a J-REIT's sponsor, as well as its financial variables, has a substantial effect on the investment corporation's credit risk. A sponsor's probability of default is a leading indicator of its investment corporation's default and double default probability acts as a coincident indicator of default. Network analysis indicates that some network centralities are proxies for funding liquidity via blockholding and lending networks. Rather than increases in other types of degrees, an increase in the degree of an investment corporation's lending in the lending network explains a decrease in a J-REIT's credit risk.

The Night and Day of Amihud's (2002) Liquidity Measure

Amihud's (2002) stock (il)liquidity measure averages daily ratios of absolute close-to-close return to dollar volume, including overnight returns, while trading volumes come from regular hours. Our modified measure addresses this mismatch by using open-to-close returns. It is more strongly correlated with standard trading-cost measures (by 8-37%) and it better explains cross-sections of returns, doubling estimated liquidity premia. Using non-synchronous trading near close as an instrument reveals that overnight returns are primarily information-driven and orthogonal to price impacts of trading: including them in liquidity proxies magnifies measurement error, understating liquidity premia. Our modification helps wherever use of Amihud's measure is required. Our measures are publicly available to researchers for the years 1964-2019, and can be updated in future years using CRSP and COMPUSTAT.

The Role of Sharia Monetary Instrument in Liquidity Management and Performance Improvement of Islamic Banking Financial in Indonesia

This study analyzes the variables of liquidity and financial performance of Islamic banks that affect the number of transactions in Islamic monetary instruments. The aim is to find out which instruments is better in supporting liquidity management and financial performance of Islamic banks in Indonesia. This study uses the CAR and FDR variables as proxies of liquidity and ROA as a proxy for the financial performance of Islamic banks. While the proxy for sharia monetary instruments in Indonesia is the variable SBIS and SBPUS. This study uses monthly Islamic banking reports in Indonesia for the period January 2015 to September 2017. Data is processed and analyzed by Augmented Dickey-Fuller (ADF) Stationery Test as a way of testing stationary data and then testing hypotheses using Vector Autoregression (VAR). This study found that the the most contributing variable to the changes in transaction volume in Islamic monetary instruments was the variable liquidity, namely CAR and FDR. In Addition, SBIS sharia monetary instruments are better used by Islamic banking in Indonesia compared to SBPUS.

How foreign investors influence stock markets? The Saudi Arabian experience

ABSTRACTThis paper investigates the impact of foreign institutional investors on valuation, liquidity and volatility in the Saudi stock exchange for the post-liberalization period. Saudi regulators allowed the foreign investment community to invest in the Tadawul All Share Index (TASI) in June 2015. Firstly, the paper finds a positive change in abnormal returns in the three-year post-liberalization period compared to the three-year non-liberalization period (pre-period), suggesting that the entry of qualified foreign institutional investors (QFIIs) benefited security valuation. Further, the higher valuation result is consistent with the prediction of standard international asset pricing models, that stock market liberalization may reduce the liberalizing country’s cost of equity capital by allowing for risk sharing between domestic and foreign agents. Secondly, contrary to the regulators/policymakers’ intention and empirical evidence, the liquidity proxies document mixed evidence. Lastly, this study finds mixed evidence in the price volatility measures. However, the volatility and liquidity finding suggests that the presence of foreign institutional investors is not the source of excess volatility or high turnover on local bourses. Overall, the evidence, on average, shows some signs of improvement for different market efficiency measures during the post-liberalization period compared to the pre-liberalization period. The less than expected improvement in Tadawul during the post-period implies that the Saudi financial regulator’s incentive of opening the TASI for QFIIs coincides with economic vulnerabilities for the Kingdom, stringent QFIIs regulation and weak investor protection laws.

Demystifying Yield Spread on Corporate Bonds Trades in India

This paper aims to study the dynamics of corporate bond yield spread in India, and attempted to identify the possible determinants: bonds’ liquidity, credit quality and therefore their yield spreads. A large sample of daily corporate bond trade data over a period of 6 years (2011–2016), classified into Issuers Segment-wise and Rating-wise, are analyzed within a basic statistical framework and using panel regression model. Default risk, as captured by the credit rating, is found to significantly affect the yield spread, for all types of securities. Even if the summary statistics and panel regression results broadly support the relationship between bond liquidity, captured through various bond characteristics and trade statistics, and yield spread, use of better liquidity proxy measure may improve the said relationship. Movements in equity market also affect corporate bond yield spread in India.

The Determinants of Securities Trading Activity: Evidence from Four European Equity Markets

Purpose The main objective of this study is to obtain new empirical evidence about the connections between equity trading activity and five possible liquidity determinants: market capitalisation, dividend yield, earnings yield, company growth, and the distinction between recently-listed firms as opposed to more established ones. Design / Methodology / Approach We use a sample of 172 stocks from four European markets and estimate models using the entire sample data and different sub-samples to check the relative importance of the above determinants. We also conduct a factor analysis to re-classify the variables into a more succinct framework. Findings The evidence suggests that market capitalisation is the most important trading activity determinant, and the number of years listed ranks thereafter. Research limitations / implications The positive relation between trading activity and market capitalisation is in line with prior literature, while the findings relating to the other determinants offer further empirical evidence which is a worthy addition in view of the contradictory results in prior research. Practical implications This study is of relevance to practitioners who would like to understand the cross-sectional variation in stock liquidity at a more detailed level. Originality / value The originality of the paper rests on two important grounds: (a) we focus on trading turnover rather than on other liquidity proxies, since the former is accepted as an important determinant of the liquidity generation process, and (b) we adopt a rigorous approach towards checking the robustness of the results by considering various sub-sample configurations.

Is Too Much Liquidity Harmful to Economic Growth?

This paper provides evidence on the relationship between financial liquidity and economic growth. Using a panel data of 136 countries, we find that there exists a threshold above which the marginal effect of financial liquidity on economic growth becomes negative. In particular, the turning points for which domestic credit to private sector and stock market turnover start having negative effect on growth are 104% GDP and 105% respectively. Our results are robust to country income level groups, alternative model specifications, proxies for financial liquidity, and are not driven by macroeconomic volatility, banking crises, stock market crashes.

The Non-Trading Problem in Assessing Commonality in Liquidity on Emerging Stock Markets

The purpose of this study is to explore commonality in liquidity on seven small emerging CEE stock markets in the Czech Republic, Hungary, Slovakia, Slovenia, Lithuania, Estonia, and Latvia, in the context of serious problems with stock illiquidity. The number of companies that reveal a substantial non-trading problem is large. A modified version of the Amihud measure is utilized as daily liquidity proxy for stocks. The OLS-HAC method and the GARCH-type models are employed to infer the patterns of commonality in liquidity. No reason has been found to support intra-market commonality in liquidity on each investigated stock exchange.

Which Liquidity Proxy Measures Liquidity Best in Emerging Markets?

This study empirically investigates the low-frequency liquidity proxies that best measure liquidity in emerging markets. We carry out a comprehensive analysis using tick data that cover 1183 stocks from 21 emerging markets, while also comparing various low-frequency liquidity proxies with high-frequency spread measures and price impact measures. We find that the Lesmond, Ogden, and Trzcinka (LOT) measure is the most effective spread proxy in most emerging markets. Among the price impact proxies, the Amihud measure is the most effective.

Stock Liquidity and Dividend Policy

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Unveiling Contemporaneous Relations Between Jump Risk and Cross Section of Stock Returns

AbstractThis study analyzes the impact of time varying jump risk on aggregate returns. We, in particular, examine the pricing of jump size and intensity components in the cross section of stock returns for four Asian markets. We use stochastic volatility model with jumps to estimate jump size and intensity. Fama–MacBeth regression results indicate that both jump size and intensity have statistically significant effect on expected returns. A one standard deviation increase in jump intensity beta lowers the expected annual returns by 1% for Japan, 2% for China, 5% for India, and 7% for South Korea. The results are consistent even after controlling for the Fama and French three factors, firm size, and liquidity proxies.

Turnover: Liquidity or Uncertainty

Turnover is usually used as a proxy for stock liquidity. The negative relation between turnover and expected stock returns is regarded as evidence of the existence of liquidity premium. Turnover is also often used to measure the firm-specific uncertainty. The positive relation between turnover and expected stock returns is considered as the compensation for uncertain risks. Obviously, there is a conflict in the interpretation of the turnover risk information. Taking A shares in the Chinese stock market as the research object, we find that stocks with low turnover generally have higher risk premium than those with high turnover through portfolio analyses and cross-sectional regression analyses. Moreover, after controlling variables such as size, trading volume, beta, liquidity and uncertainty, the result is still robust. However, after building more subdivided portfolios according to turnover, we find that turnover can positively predict stock returns for stocks with low turnover, but it can negatively predict stock returns for stocks with high turnover. That is, the cross-sectional expected return is the first increasing and next descending function of turnover. We take the directional reversal point of the return forecast ability as the dividing point of the turnover level, and find that the uncertainty proxied by the total volatility and the idiosyncratic volatility can significantly explain the positive relationship between turnover and expected returns for stocks with turnover below the cross-sectional dividing point, but the liquidity can significantly explain the negative relationship between turnover and expected returns for stocks with turnover above the cross-sectional dividing point. Thus, the lower degree of turnover contains more firm-specific uncertainty information, and the higher degree of turnover reflects more stock liquidity information. During our sample period, the trading mechanism in the Chinese stock market has undergone major changes. After the sample period is divided into four stages according to several major trading mechanism reforms in the Chinese stock market, the empirical results are still significant and therefore the reforms of the transaction mechanism have not fundamentally changed the turnover risk information. By defining the turnover risk information, this paper not only provides theoretical support for other related research by dint of turnover, but also has direct guiding significance for investment practice according to turnover.

A Market-Based Funding Liquidity Measure

AbstractWe construct a traded funding liquidity measure from stock returns. Guided by a model, we extract the measure as the return spread between two beta-neutral portfolios constructed using stocks with high and low margins, to control for their sensitivity to the aggregate funding shocks. Our measure of funding liquidity is correlated with other funding liquidity proxies. It delivers a positive risk premium that cannot be explained by existing risk factors. A model augmented by our funding liquidity measure has superior pricing performance for various portfolios. Despite evident comovement, this measure contains additional information that is not subsumed by market liquidity.Received March 29, 2017; accepted August 8, 2018 by Editor Wayne Ferson.