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State-Dependent Illiquidity Premium in the Korean Stock Market

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  • Jeewon Jang
  • Jangkoo Kang
  • Changjun Lee

Abstract

We study the relation between the illiquidity premium and economic states in the Korean stock market. We find that aggregate market liquidity improves following real economic expansions and expansive monetary states and worsens after economic recessions and restrictive monetary states. The improved liquidity in the expansion–expansive state generates a huge illiquidity premium, while an illiquidity premium does not exist in the recession–restrictive state. As a result, the observed illiquidity premium displays strong state-dependent variations. Our empirical results indicate that a significant unconditional illiquidity premium in the Korean stock market arises due to a substantial illiquidity premium in the expansion–expansive state.

Suggested Citation

  • Jeewon Jang & Jangkoo Kang & Changjun Lee, 2015. "State-Dependent Illiquidity Premium in the Korean Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(2), pages 400-417, March.
    • Handle: RePEc:mes:emfitr:v:51:y:2015:i:2:p:400-417
    DOI: 10.1080/1540496X.2015.1016842
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    Cited by:

    1. Chia-Cheng Chen & Chia-Li Tai & Yi-Sheng Liu, 2020. "Illiquidity Premium and Monetary Conditions in Emerging Markets: An Empirical Examination of Taiwan Stock Markets," International Journal of Economics and Financial Issues, Econjournals, vol. 10(1), pages 109-117.
    2. Chia-Cheng Chen & Chia-Li Tai & Yi-Chun Cho, 2019. "Market Illiquidity Premium on Stock Returns: An Empirical Study of Taiwan Stock Markets," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(7), pages 778-788, July.
    3. Tiwari, Aviral Kumar & Abakah, Emmanuel Joel Aikins & Karikari, Nana Kwasi & Gil-Alana, Luis Alberiko, 2022. "The outbreak of COVID-19 and stock market liquidity: Evidence from emerging and developed equity markets," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    4. Butt, Hilal Anwar & Demirer, Riza & Sadaqat, Mohsin & Suleman, Muhammad Tahir, 2022. "Do emerging stock markets offer an illiquidity premium for local or global investors?," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 502-515.
    5. Xuechun Zhang & Ruihui Xu & Xue Liu, 2022. "Premiums between Cross‐listed Shares: Determinants and Assessment of Financial Reform Policy Effectiveness," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 30(3), pages 75-99, May.
    6. Francisco Javier Vasquez-Tejos & Prosper Lamothe Fernández, 2020. "Liquidity Risk and Stock Return in Latin American Emerging Markets," Investigación & Desarrollo 0420, Universidad Privada Boliviana, revised Nov 2020.
    7. Szymon Stereńczak, 2020. "State-Dependent Stock Liquidity Premium: The Case of the Warsaw Stock Exchange," IJFS, MDPI, vol. 8(1), pages 1-24, March.

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