{"title":"Which Market Enhances Market Efficiency by Improving Liquidity? Evidence of Market Liquidity in Relation to Returns of Stocks","authors":"Guy S. Liu, Jinke Li, A. Gregoriou, Y. Bo","doi":"10.1162/asep_a_00860","DOIUrl":null,"url":null,"abstract":"Abstract Market efficiency can be enhanced by market liquidity if it promotes value creation, leading to increasing stock returns. A positive relation between liquidity and stock returns implies capital movement towards more efficient investment at a low cost for value creation. Existing studies are controversial for the relation being positive, negative, or inconclusive. With such inconsistency, this paper uses data from more than 3,200 company stocks from the UK, the United States, Germany, and China securities markets over a 10-year period to estimate the relation across these four markets, respectively. The framework of estimation is robust to outliers and macro shocks, while eliminating the issues of multicollinearity, autocorrelation, and endogeneity. The study finds some interesting results. We report strong evidence for Germany and the UK of a positive relationship between returns and liquidity. In contrast, China exhibits the opposite result, and the United States provides inconclusive evidence, possibly caused by significant diversification of value perception on liquidity. Our results imply that the German and the UK markets are more efficient than the emerging market of China because liquidity assists capital movement more efficiently. The policy implication of this research is that, for emerging stock markets, the costs of capital movement should be reduced in order to increase the efficiency of funding allocation.","PeriodicalId":52020,"journal":{"name":"Asian Economic Papers","volume":null,"pages":null},"PeriodicalIF":5.3000,"publicationDate":"2023-02-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Asian Economic Papers","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.1162/asep_a_00860","RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
Abstract Market efficiency can be enhanced by market liquidity if it promotes value creation, leading to increasing stock returns. A positive relation between liquidity and stock returns implies capital movement towards more efficient investment at a low cost for value creation. Existing studies are controversial for the relation being positive, negative, or inconclusive. With such inconsistency, this paper uses data from more than 3,200 company stocks from the UK, the United States, Germany, and China securities markets over a 10-year period to estimate the relation across these four markets, respectively. The framework of estimation is robust to outliers and macro shocks, while eliminating the issues of multicollinearity, autocorrelation, and endogeneity. The study finds some interesting results. We report strong evidence for Germany and the UK of a positive relationship between returns and liquidity. In contrast, China exhibits the opposite result, and the United States provides inconclusive evidence, possibly caused by significant diversification of value perception on liquidity. Our results imply that the German and the UK markets are more efficient than the emerging market of China because liquidity assists capital movement more efficiently. The policy implication of this research is that, for emerging stock markets, the costs of capital movement should be reduced in order to increase the efficiency of funding allocation.
期刊介绍:
The journal Asian Economic Papers (AEP) is supported by several prominent institutions, including the Center for Sustainable Development at Columbia University in the United States. This shows that there is a strong emphasis on sustainable development within the journal's scope. Additionally, the Korea Institute for International Economic Policy in South Korea, the UN Sustainable Development Solutions Network (SDSN) in Malaysia, and the Economic Research Institute for ASEAN and East Asia in Indonesia also sponsor AEP. The articles published in AEP focus on conducting thorough and rigorous analyses of significant economic issues pertaining to specific Asian economies or the broader Asian region. The aim is to gain a deeper understanding of these issues and provide innovative solutions. By offering creative solutions to economic challenges, AEP contributes to the discourse and policymaking that impact the Asian economies and region as a whole.