Liquidity determinants and how they affect the Greek Stock Market

Abstract

Studies in the matured financial markets indicate that liquidity contributes to market efficiency and stability and it should be taken under serious consideration when we try to explain or even forecast price and volatility fluctuations. Liquidity refers to the ability to trade an asset without significantly affect its price and can either enhance market prosperity or cause market disorder when it substantially decreases in the market, thus research is imperative and still goes on to further investigate its determinants. Therefore, it is of great interest to test whether liquidity also associates to a semi-developed market such as the Greek Stock Market, and to what degree. The Greek Stock Market is characterized as a semi-developed market because it exhibits characteristics that lay in between emerging and matured markets. It still has not reached an equilibrium point where assets will trade close to their fair prices, it is not a volatile as emerging markets are, and it has better growth potential compared to mature markets but lower growth potential compared to emerging markets. Specifically, up to year 1998 the Athens Stock Exchange (ASE) was traded at low price levels without large deviations and was mainly dependent on political and macroeconomic changes. In the second quarter of 1998 Greek economy started to grow at an immense rate and investors became active and more involved to the stock market. Stock returns increased by 58,5% and volume increased by 146,63% only in the second quarter of 1998 and they reached their peak in the third quarter of 1999. The purpose of this study is, hence, to empirically investigate if liquidity affects the Greek Stock Market and to what extent and it focuses on two aspects of liquidity, namely market depth and price volatility. Market depth is measured by the daily trading volumes of the General Index of the Greek Stock Market for the period 1-1-1998 to 30-6-2005 whereas price volatilities are derived by a Garch (1, 1) model for the same period. The data are then incorporated into a well-specified OLS model, which explains the impact of trading volume, price volatility and lagged returns on the returns of the General Index of the Greek Stock Market.