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Liquidity discount in the opaque market: The evidence from Taiwan's Emerging Stock Market

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  • Yeh, Chung-Ying
  • Yeh, Shih-Kuo
  • Chen, Ren-Raw

Abstract

The decentralized OTC market is extremely illiquid and opaque in comparison with the exchange-listed stock market. Although liquidity risk has been well documented in the finance literature, little is known about how liquidity risk affects the stocks traded in the decentralized OTC market. In this study, we investigate liquidity risk on the cross section of stock returns in Taiwan's Emerging Stock Market (TESM), which is a typical decentralized OTC market. Liquidity risk is measured by the liquidity discount devised by Chen (2012). We empirically find that (i) firm-specific liquidity discounts hinge on the attributes pertaining to firm-specific and economic fundamentals; (ii) liquidity risk is priced in both OTC and exchange-listed stock markets, and the risk premia are material and increase when liquidity deteriorates; and (iii) the effect of the subprime crisis is more severe for stocks with high liquidity discounts, which partially explains the behavior of investors' flight-to-liquidity during the time of crisis.

Suggested Citation

  • Yeh, Chung-Ying & Yeh, Shih-Kuo & Chen, Ren-Raw, 2014. "Liquidity discount in the opaque market: The evidence from Taiwan's Emerging Stock Market," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 297-309.
    • Handle: RePEc:eee:pacfin:v:29:y:2014:i:c:p:297-309
    DOI: 10.1016/j.pacfin.2014.03.004
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    Cited by:

    1. Chen, Ren-Raw & Yang, Tung-Hsiao & Yeh, Shih-Kuo, 2017. "The liquidity impact on firm values: The evidence of Taiwan's banking industry," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 191-202.

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    More about this item

    Keywords

    OTC market; Liquidity risk; Liquidity discount; Risk premia; Flight-to-liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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