Impact of liquidity on stock returns listed in Borsa Istanbul

Abstract

This study investigates the impact of liquidity on returns of stocks traded at Borsa İstanbul for the 2002-2014 period. Turnover rate, which is defined as average volume of a firm divided by the number of shares outstanding of that firm, is used as a liquidity measure. Liquidity effect is examined following panel data analysis and robust estimators controlling the effect of well-known firm-specific characteristics. The results show that turnover rate has a significant and negative effect on stock returns. This result indicates that investors request compensation for holding illiquid assets. In other words, they request compensation for the assets with low turnover. The impact of turnover rate on stock returns is significant for the whole year; therefore, results are not driven by the January effect.