Liquidity Risk And Stock Return Analysis

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This section will present a framework to be a guideline of theoretical elements for the empirical analysis of liquidity risk and stock return. There are a few literature from variety researchers had done the analytical framework, thus some important models from researchers will be useful in this study Pastor, L. & Stambaugh, R. F. (2003), was used those variables to investigate the liquidity risk and expected stock returns, also realized that the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities in the year 1966 until 1999. According to Pastor, L. & Stambaugh, R. F., they are used stock return to measure the market-wide is a state variable important for asset pricing as …show more content…
& Mendelson, H. (1986), in their study about liquidity and stocks returns, they are used same relation that expressed by the following formula;
R = r + f(s), where R is the return on a stock with % spread s; while r is the required net return (which depends on stock risk); and f(s) is an increasing and concave function. Thus, the variables below are based on several variables that are used by Pastor, L. & Stambaugh, R. F. (2003), in their study investigates whether expected returns are related to liquidity risk in returns, as averse to the level of liquidity and supplement variable is an investment perspective on liquidity risk. 2.3.1 Stock Return Foregoing researches using stock return to measure whether market-wide liquidity is indeed priced in their study. According to Investopedia (2017), a return is between gain and loss of a security in some period. In general rule shows that the more risk a company or individual take, the higher potential to gain returns and losses. A cross-section model is estimated of monthly stock returns as a function of stock characteristics, for every month m=1,2,…12 in year y, y=1964, 1965,…1997 (a total of 408
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Firstly, illiquidity from microstructure data which use two measures of illiquidity, the price impact measure and the fixed cost component (Brennan and Subrahmanyam, 1996). According to Yakov Amihud (2000), illiquidity is negatively correlated with variables that are known proxy measures of liquidity. Besides, the turnover ratio, is calculated for each stock and the calculation from daily data accounts for mid-year changes in the number of shares outstanding due to the stock splits, stock dividends, stock issues and stock repurchase. The dollar volume of stock is the sum over the year of the daily product share volume by the price, and also previous study shows that size is the market capitalization of stock at the end of the year. According to Harris (1994), the stock price at the end of the year, should be related to liquidity because the lower tick affects the lower bid-ask spread as % of

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