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Capital markets’ focus has recently been on the common determinants of liquidity
instead of specific determinants for their well-functioning. This makes liquidity
commonality an important area of research for academicians, investors, market players,
and policymakers. The current study investigates the liquidity commonality risk within
the Fama and French framework in the equities of developed and emerging markets,
from June 2005 to July 2015. Multiple measures of liquidity, including the Hui-Heubel
liquidity ratio, Amihud ratio, Roll estimator and turnover ratio are employed on the
panel data to calculate market liquidity. The panel regression results with fixed effects in
the study strongly support the existence of the commonality risk in stock markets.
Liquidity commonality risk is weakly priced in Pakistan’s equities as compared to
equities of China and Japan. In contrast to Japan, the co-movement between market
liquidity and stock liquidity is negative in China that shows deviation from liquidity
commonality theory. The findings of the study reveal that investors should incorporate
the liquidity commonality risk in designing their portfolios.
Sadia Saeed, Arshad Hassan. (2019) Liquidity Commonality Risk and Asset Pricing in Emerging and Developed Stock Markets, NUML International Journal of Business & Management, Volume 14, Issue 2.
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