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Liquidity Mismatch Index and Banks’ Stock Returns

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  • Godfrey Marozva

Abstract

Purpose: This article empirically examine the relationship between Liquidity mismatch index and bank stock returns. Design/Methodology/Approach: Using the panel data of 9 South African Banks from 2008 to 2019, the Augmented capital asset pricing model and Fama and French’s (2015) five factor model were employed to empirically examine the nexus between Liquidity mismatch index and bank stock returns. Two liquidity measures, the bank liquidity mismatch index and the aggregate liquidity mismatch index were put into perspective. Findings: The results revealed that liquidity is a significant factor when pricing banks’ stock returns. Bank liquidity mismatch index was found to be positively and significantly related to bank stock returns. While, the Aggregate liquidity mismatch index was found to be negatively related to stock returns, and the relationship was significant. Therefore, liquidity can play a role in asset pricing models. Moreover, these liquidity measure effectively captured the aspect of liquidity stress test and contagion effects. Practical Implications: The aggregate liquidity mismatch index provided a good macro-prudential liquidity measure which could be included in various dynamic stochastic general equilibrium (DSGE) models. Since results revealed that BLMI positively influence stock returns banks are recommended to hold significant liquidity buffers to take advantage of opportunities when they present themselves. This recommendation is in line with the BASEL III liquidity proposal. Originality/Value: Investigating the impact of liquidity particularly on bank stocks provides important contribution to the body of knowledge since banks are the main drivers of liquidity creation. Empirical literature does not sufficiently articulate the linkage between bank liquidity and bank stock returns of emerging markets particularly within the context of asset-liability mismatches while accounting for liquidity spirals.

Suggested Citation

  • Godfrey Marozva, 2020. "Liquidity Mismatch Index and Banks’ Stock Returns," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 930-945.
    • Handle: RePEc:ers:ijebaa:v:viii:y:2020:i:4:p:930-945
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    More about this item

    Keywords

    Bank Liquidity; liquidity mismatch index; stock returns; LCAPM; FF5F.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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