Illiquidity and Stock Market Returns during Financial Crises in India

Proceedings of The 4th International Conference On Business, Management and Finance

Year: 2021


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Illiquidity and Stock Market Returns during Financial Crises in India

Niranjan Ashok Jahagirdar,  Shivansh Agarwal and Manthan Dharmeshkumar Patel



This study investigates the role of liquidity with respect to stock market returns before, during, and after a financial crisis. We refer to firm-wise data from 2006 to 2021 to analyze the effect of illiquidity on stock returns with respect to the two major financial crises in the past two decades – the 2008 Global Financial Crisis and the 2020 economic crisis caused due to the Covid-19 pandemic. The study will be using the 500 stocks constituting the NIFTY 500 index of the National Stock Exchange (NSE), India, as of 28th June 2021. We also examine whether the effect of illiquidity on stock returns depends on the company’s size by classifying our stock data into 5 portfolios each with 100 companies based on market capitalization. In this analysis, we consider depth, breadth, tightness, and immediacy dimensions of liquidity using share turnover, Amihud Illiquidity Ratio, spread, and elasticity of trading as their respective proxies. We model the effects of these metrics on stock returns by using the panel Autoregressive Distributed-lag (p-ARDL) Bounds Testing Approach as well as the Liquidity Augmented Capital Asset Pricing Model (LCAPM) proposed by Acharya and Pederson, 2005. We aim to calculate, analyze, and explain the differences and similarities between the effect of illiquidity of stock returns depending on the firm size and the economic conditions of that period.

keywords: 2008 Global Financial Crisis; ARDL; Covid-19 pandemic; LCAPM; National Stock Exchange (NSE), India.