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The Effect of Implicit Market Barriers on Stock Trading and Liquidity

Author

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  • Asem Alhomaidi
  • M. Kabir Hassan
  • William J. Hippler

Abstract

We compare the performance of Islamic and conventional stock returns in Saudi Arabia in order to determine whether the Saudi market exhibits characteristics that are consistent with segmented markets and investor recognition effects. We sample the daily stock returns of all Saudi firms from September 2002 to 2015 and calculate important measures, including idiosyncratic volatility (Ang et al, 2006), market integration (Pukthuanthong and Roll, 2009), systematic turnover (Loughran and Schultz, 2005), and stock turnover and liquidity (Amihud, 2002). Integration tests report that Islamic stocks are more sensitive to changes in global and local macroeconomic variables than conventional stocks, supporting the hypothesis that the Islamic and conventional stock markets are segmented in Saudi Arabia. In addition, our results show that Islamic stocks have a broader investor base, lower idiosyncratic risk, higher systematic turnover, and are more liquid than conventional stocks, which support the investor recognition hypothesis. Our results provide new evidence on asset pricing in emerging markets, the evolving Islamic financial markets, and the potential impact of other implicit market barriers on global financial markets.

Suggested Citation

  • Asem Alhomaidi & M. Kabir Hassan & William J. Hippler, 2018. "The Effect of Implicit Market Barriers on Stock Trading and Liquidity," NFI Working Papers 2018-WP-02, Indiana State University, Scott College of Business, Networks Financial Institute.
    • Handle: RePEc:nfi:nfiwps:2018-wp-02
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    More about this item

    Keywords

    Segmented markets; Islamic finance; Emerging markets; Asset pricing; Investor recognition;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • F3 - International Economics - - International Finance
    • P5 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems

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