TY  - JOUR
AU  - Bekaert,Geert
AU  - Harvey,Campbell R.
AU  - Lundblad,Christian
TI  - Liquidity and Expected Returns: Lessons From Emerging Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11413
PY  - 2005
Y2  - June 2005
UR  - http://www.nber.org/papers/w11413
L1  - http://www.nber.org/papers/w11413.pdf
N1  - Author contact info:
Geert Bekaert
Graduate School of Business
Columbia University
3022 Broadway, 411 Uris Hall
New York, NY 10027
Tel: 212/854-9156
Fax: 212/662-8474
E-Mail: gb241@columbia.edu

Campbell R. Harvey
Duke University
Fuqua School of Business
Durham, NC 27708-0120
Tel: 919/660-7768
Fax: 919/660-8030
E-Mail: cam.harvey@duke.edu

Christian Lundblad
Department of Finance
University of North Carolina at Chapel Hill
Chapel Hill, NC  27599-3490
Tel: 919-962-8441
Fax: 707-371-7060
E-Mail: Christian_Lundblad@unc.edu
M2  - featured in NBER digest on 2005-06-20
AB  - Given the cross-sectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find that our liquidity measures significantly predict future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with contemporaneous return shocks and negatively correlated with shocks to the dividend yield. We consider a simple asset pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and periods. Our results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not eliminated its impact.
ER  -