Size, Value and Liquidity. Do They Really Matter on an Emerging Stock Market?

The paper provides new evidence on the factors that explain stock returns on the emerging markets. It focuses on the largest and most developed of the Central and Eastern European markets, the Polish stock market, which has been previously overlooked by the literature. In addition to the established factors, such as market, size and book-to-market value we investigate whether liquidity helps explaining Polish stock returns. The literature argues that liquidity should play a role on an emerging stock market where securities and investors are scarce and trading volumes are lower than on developed markets. The study is based on a hand-collected and carefully constructed dataset. In addition, our paper utilizes the largest array of liquidity measures considered in the literature to-date. In this way we ensure that our results are robust to multiple dimensions of liquidity. Our results support the hypothesis that the market, size, and book-to-market factors are important for explaining returns on the emerging Polish stock market. However, contrary to the expectations we do not find convincing evidence that liquidity is a priced factor. The results are robust across various liquidity measures and time periods.

Lischewski, Judith and Svitlana Voronkova (2010), Size, Value and Liquidity. Do They Really Matter on an Emerging Stock Market?, ZEW Discussion Paper No. 10-070, Mannheim.