An empirical analysis of the determinants of equity market liquidity

Abstract

The aim of this dissertation is to investigate whether particular stock characteristics may be used to account for varying levels of liquidity across a selection of stocks. Liquidity refers to the extent to which an asset or security can be easily traded in the market or on an exchange; without experiencing major changes in its price. Thus, higher liquidity implies that stocks can be traded at lower costs and the investor is likely to obtain cash more quickly when in need. This is why liquidity is a desired attribute when it comes to trading securities.

In order to discover what causes the largest impact on liquidity, the following five main determinants are considered: Market Capitalization, Number of years listed, Dividend Yield, Earnings Yield, Company growth Rate.

A sample of 172 stocks is extracted from four different stock exchanges including: Malta Stock Exchange, London Stock Exchange, Vienna Stock Exchange, Bolsa De Madrid.

Subsequently, several regressions are carried out among the stocks trading on a particular exchange and also for the entire sample. Through the significance of the coefficients and regression explanatory statistics, it is determined which explanatory variable explains the largest percentage of variation in the dependant variable, that is liquidity.

Having conducted the research in our dissertation, it was concluded that market capitalization turned out to be the main determinant for liquidity in all exchanges, expect for the Vienna Stock Exchange.