Flight-to-Liquidity and Excess Stock Return: Empirical Evidence from a Dynamic Panel Model

Article

Ali, Asif, Rahman, Habib Ur, Arian, Adam and Sands, John. 2023. "Flight-to-Liquidity and Excess Stock Return: Empirical Evidence from a Dynamic Panel Model." Journal of Risk and Financial Management. 16 (12). https://doi.org/10.3390/jrfm16120515
Article Title

Flight-to-Liquidity and Excess Stock Return: Empirical Evidence from a Dynamic Panel Model

ERA Journal ID213440
Article CategoryArticle
AuthorsAli, Asif, Rahman, Habib Ur, Arian, Adam and Sands, John
Journal TitleJournal of Risk and Financial Management
Journal Citation16 (12)
Article Number515
Number of Pages16
Year2023
PublisherMDPI AG
Place of PublicationSwitzerland
ISSN1911-8066
1911-8074
Digital Object Identifier (DOI)https://doi.org/10.3390/jrfm16120515
Web Address (URL)https://www.mdpi.com/1911-8074/16/12/515
AbstractThis study examines the impact of the flight-to-liquidity (FTL) phenomenon on the excess stock return by applying the previously developed generalised method of moments (GMM) framework. For this purpose, we use the data covering the period from 2004 to 2018 for 122 public companies listed on the Pakistan Stock Exchange (PSX). This study uses six proxies to measure the expected and unexpected illiquidity. The empirical investigation reveals that expected and unexpected illiquidities greatly influence smaller firms more notably than larger ones, which induces FTL phenomena into the market. Moreover, a FTL phenomenon triggered the Pakistani equity market during the financial crisis, when a significant decline appeared and the less liquid stocks were strongly affected. The results reveal that FTL risk is priced in the Pakistan equity market, making large stocks relatively more attractive in times of dire liquidity. These findings further suggest that the market participants in the Pakistan equity market, including policymakers, regulators and investors, should not ignore FTL phenomena while designing their portfolios.
Keywordsfinancial crisis; stock return; financial crisis; Pakistani equity market; investors
Contains Sensitive ContentDoes not contain sensitive content
ANZSRC Field of Research 2020350105. Management accounting
Byline AffiliationsPakistan Institute of Development Economics, Pakistan
Holmes Institute
School of Business
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