Abstract
This paper examines the role of illiquidity as a determinant of stock returns in emerging markets by (i) presenting a comparative analysis from two popularly utilized liquidity proxies, i.e. the price impact (PI) measure of Amihud (2002) and the zero-return (ZR) measure of Lesmond et al. (1999); and (ii) testing for illiquidity effects, both in a panel of 20 emerging stock markets and at the local level for each market. We show that the choice of the liquidity proxy plays an important role on the assessment of liquidity effects in emerging stock market returns. While we confirm the presence of a significant and positive illiquidity premium in both the panel tests and at the individual market level, we observe stronger results when illiquidity is captured by the zero-return measure. We also observe that the illiquidity premium has di-minished over time, in line with the evidence that suggests capital market anomalies have attenuated over time. The findings suggest that the excess returns associated with illiquidity are more likely driven by mispricing than compensation for risk and emerging stock markets still offer ample opportunities for both global and local investors towards active investment strategies that can exploit liquidity patterns in these markets. (c) 2022 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.