Liquidity premium in stock returns, the case of Vietnam

In bài này

By: Tran Quang Duy - VNP 19

Supervisor: Dr. Pham Phu Quoc

Research about the role of liquidity in explaining stock returns has mainly been conducted in developed market and yielded ambiguous conclusion about its explanatory power. From this gap in literature, this empirical research is conducted to examine the influence of liquidity on stock returns in Vietnam stock market, a frontier market. From literature of liquidity and stock returns, there are number of available proxies for liquidity. In this research, Turnover and Amihud illiquidity ratio are selected as two main liquidity proxies. These two proxies were selected because they showed a great consistency and reliability among available liquidity proxies for empirical research. This study also includes some common explanatory variables in stock return literature as control variables in empirical regressions. These variables are five premium factors of Fama and French as well as cumulative returns factor. All of these factors are constructed by using portfolio formation method of Fama and French. The sample for this research includes all non- financial firms in Ho Chi Minh stock exchange (HOSE) for period 2007 to 2013. The regression method is Fama MacBeth which is often employed in finding stock returns. This research reveals some noticeable findings. Firstly, liquidity negatively related to stock returns. This finding was reliable as two liquidity proxies point to the same conclusion. Secondly, all Fama and French factors showed that they are very effective in explain stock returns as all these variables present very convincing results. Thirdly, the empirical result from this study fail to support the role cumulative return factor in explaining stock returns in Vietnam.

Keywords: Fama and French factors, Turnover measure, Amihud illiquidity ratio, Stock returns, Fama McBeth regression, Listed companies, SMB, HML, CMA, RMW