Journal of Management Research
Volume 22, Number 2 (July - December 2022)
ISSN: 0972-5814 Online ISSN: 0974-455X
Does Liquidity Predicts the Stock Price Volatility: Evidence from the Asia Pacific Markets
Jyoti Kumari
| Abstract |
This paper investigates the relationship between market liquidity and stock market volatility in a non-linear conditional framework. The research on the issue is still in its infancy and has received some attention in the US and advanced markets in Europe due to advances in microstructure literature and liquidity crunch during the global financial crisis. The study empirically examines whether the liquidity risk is priced into the markets, and the liquidity premium is an essential reward for the volatile stock price behavior in Asia Pacific markets.
Such an investigation is warranted in the Asia Pacific Markets in light of the global financial markets integration and rapid growth and high profile along with a unique policy framework prevalence in these countries. The study shows the significant role of market liquidity in predicting the stock price volatility in the Asia Pacific Markets. Further, the VAR and causality analysis suggest interlinkages between market liquidity and conditional asset price volatility. The study supports the theoretical propositions that rational risk-averse investors always earn from time-varying liquidity premiums by choosing the investment strategy based on the liquidity in the markets. The findings of the study offer intriguing insights into investment decisions, portfolio diversification, and risk management.
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