Stock market liquidity and stock returns: evidence from the London Stock Exchange



Wang, Wei
Stock market liquidity and stock returns: evidence from the London Stock Exchange. Master of Philosophy thesis, University of Liverpool.

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Abstract

In this thesis, I investigate the effect of liquidity risk on stock returns using data from the London Stock Exchange. The main motivation behind this research is that most previous studies on this topic focus on the US stock market and very little is known about the link between liquidity and stock returns in the UK. Also, most studies only focus on one dimension of liquidity and ignore other illiquidity measures that capture different dimensions. This study employs eight different proxies of liquidity, namely bid-ask spread, effective spread, quoted spread, Liu’s (2006) measure, dollar trading volume, turnover ratio, Amihud’s (2002) RtoV ratio and Florackis et al.’s (2011) RtoTR ratio. Interestingly, the results based on the LSE do not support the existence of an illiquidity premium. In contrast, the results suggest a negative relationship between illiquidity and stock returns. As illiquidity increases, instead of seeing rises in stock returns, post-ranking returns decrease. This finding contradicts previous US evidence, which shows a positive relationship between illiquidity and stock returns.

Item Type: Thesis (Master of Philosophy)
Additional Information: Date: 2014-03 (completed)
Divisions: Faculty of Humanities and Social Sciences > School of Management
Depositing User: Symplectic Admin
Date Deposited: 08 Aug 2014 09:21
Last Modified: 19 Sep 2022 11:02
DOI: 10.17638/00017473
Supervisors:
  • Florackis, Chris
  • Kostakis, Alex
URI: https://livrepository.liverpool.ac.uk/id/eprint/17473