Liquidity and equity returns in Borsa Istanbul

Official URL: http://dx.doi.org/10.1080/00036846.2016.1170935

We investigate the relationship between expected returns and liquidity measures in Borsa Istanbul. To do so, we gather a wide range of illiquidity measures that can be applied to the market. Firm-level cross-sectional regressions indicate that there is a positive relationship between various illiquidity measures and one-month to six-month ahead stock returns. Findings of the paper are robust after using different sample periods and controlling for well-known priced factors such as market beta, size, book-to-market and momentum. The portfolio analysis reveals that stocks that are in the highest illiquidity quintile earn 7.2% to 19.2% higher risk-adjusted annual returns than those in the lowest illiquidity quintile. The illiquidity premium is stronger for small stocks and stocks with higher return volatility and it increases (decreases) during periods of extremely low (high) market returns.