On The Relationship between Aggregate Market Return and Illiquidity of NIFTY

Som Sankar Sen

Abstract


The present study has sought to investigate the relationship between daily NIFTY return and liquidity. The time series data used in this study is daily index of the NSE NIFTY for the period from March 3, 2003 to October 31, 2013. (a total of 2664 observations). The data have been obtained and downloaded from the websites www.rbi.org.in and www.nseindia.com. The TGARCH(1,1) model has been applied to model the conditional volatility. Other necessary statistics and econometric tools have also been used in proper places. The results of the investigation indicate that there exists a positive return-illiquidity relationship in the market during the study period.


Keywords


Liquidity; Amihud ; Return; Volatility.

Full Text:

PDF

References


Reference

Acharya, V. and Pedersen, L., (2005), “Asset pricing with liquidity risk”, Journal of Financial Economics, 77(2), 375-410.

Amihud, Y. (2002), “Illiquidity and stock returns cross-section and time-series effects”, Journal of Financial Markets, 5, 31-56.

Amihud, Y., H. Mendelson, (1986), “Asset pricing and the bid-ask spread”, Journal of Financial Economics, 17, 223-249.

Amihud, Y., H. Mendelson, (1988), “Liquidity and asset prices: financial management implications”. Financial Management 17, 5-15.

Amihud, Y., H. Mendelson, (1991), “Liquidity, asset prices and financial policy", Financial Analysts Journal, 47, 55-66.

Amihud, Y., H. Mendelson, Pedersen, L. H.(2005), “Liquidity and asset prices”, Foundation and Trends in Finance, 1(4), 269-364.

Black, F., (1976), “ Studies of stock price volatility changes”. Proceedings of the 1976 meetings of the American Statistical Association, Business and Economics Statistics Section. Washington, DC: American Statistical Association, 177-181.

Bodie, Kane, Marcus and Mohanty (2006), “Investment”- Tata-MacGrawhill.

Bollerslev, Tim, (1986). “Generalized Autoregressive Conditional Heteroskedasticity,” Journal of Econometrics, 31 (April): 307-327.

Brennan, M. and A. Subrahmanyam, (1995), “Investment analysis and price formation in securities markets”, Journal of Financial Economics 38, 361-381.

Brennan, M., Chordia, T. and Subrahmanyam, A. (1998), “Alternative factor specifications, security characteristics an d cross-sectional of expected returns”, Journal of Financial Economics, 49, 345-373.

Brennan, M., Subrahmanyam, A. (1996), “Market micro structure and asset pricing”, Journal of Financial Economics, 41, 441-464.

Chordia, T. & Swaminathan, B. (2000), “Trading volume and cross-autocorrelations in stock returns”, The Journal of Finance 55(2), 913-935.

Chordia, T., Roll, R. & Subrahmanyam, A. (2000), “Commonality in liquidity”, Journal of Financial Economics 56, 3-28.

Chordia, T., Roll, R. & Subrahmanyam, A. (2001), “Market liquidity and trading activity”, The Journal of Finance 56(2), 501-530.

Chordia, T, Sarkar, Subrahamanyam, (2004), “The Joint Dynamics of Liquidity, Reforms and Volatility Across Small and Large Firms”, Working Paper.

Danielson, J and Payne, R (2002a), “Liquidity determination in an order driven market, Working Paper.

Datar, V.T. (1998), “Liquidity and Stock Returns : An Alternative Test”, Journal of Financial Markets,1, 205-219.

Eleswarapu, V.R., and Reinganum M. (1993) The Seasonal Behavior of Liquidity Premium in Asset Pricing. Journal of Financial Economics 34, 373–386.

Engle, Robert F. (1982). “Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of U.K. Inflation,” Econometrica, 50, 987–1008.

Fama, E.F., MacBeth, J.D., (1973). “Risk, return and equilibrium: empirical tests”. Journal of Political Economy, 81, 607–636.

Fama, Eugene F. and Kenneth R. French, (1993), “Common risk factors in the returns on stocks and bonds”, Journal of Financial Economics 33, 3-56.

Financial Markets 2, 193-226.

Gibson, Rajna, Nicolas, M, (2004), “The pricing of systematic liquidity risk: Empirical evidence from the US Stock Market, Journal of Banking and Finance, 28,157-178.

Glosten, L. R., R. Jaganathan, and D. Runkle (1993). “On the Relation between the Expected Value and the Volatility of the Normal Excess Return on Stocks,” Journal of Finance, 48, 1779–1801.

Haugen, R.L, Baker, N. L, (1996), “Commonality in the Determinants of Expected Stock Returns”, Journal of Financial Economics, 41 , 401-439

Jacoby, G, D. J. Fowler and A. A. Gottesman, (2000), “The Capital Asset Pricing Model and The Liquidity Effect: A Traditional Approach”, Journal of Financial Markets, 3, 69-81.

Jones, Charles M., (2001), “A century of stock market liquidity and trading costs”, Working paper, Columbia University.

MacKinnon, James G. (1996). “Numerical Distribution Functions for Unit Root and Cointegration Tests,” Journal of Applied Econometrics, 11, 601-618.

Pastor, L. and Stambaugh, R. (2003), “Liquidity Risk and Expected Stock Returns”, Journal of Political Economy ,111, 642-685

Phillips, P.C.B. and P. Perron (1988), “Testing for a Unit Root in Time Series Regression,” Biometrika, 75, 335-346.

Salehi, M, Talebnia, G and Behzad Ghorbani (2011), “ A Study of the Relationship Between Liquidity and Stock Returns of Companies Listed in Tehran Stock Exchange”, World Applied Science Journal, 12(9), 1403-1408.




Copyright (c) 2015 KCA Journal of Business Management

Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.