Determinants of Stock Market Liquidity: Auto Regressive Distributed Lag Based Evidence from the Emerging Equity Market

Abstract

Purpose: This research examines the impact of oil prices, exchange rate, stock market index, market volatility and inflation on the stock market liquidity. Design/Methodology/Approach: The sample period is 20 years from 2000 to 2019 on monthly basis. We employ the auto-regressive distributed lag (ARDL) approach for analyzing long run and short run nature of relationship among variables. We also apply diagnostics including, normality check, serial correlation test, heteroscedasticity test and CUSM models for the stability of the models.  Findings: We finds that exchange rate and inflation have a long-term negative relationship, but oil prices, stock returns, and stock market volatility have a long-term positive relationship with stock market liquidity. Furthermore, these findings are robust under three different proxies of stock market liquidity for three sectors: text composite, textile weaving, and textile spinning. Implications/Originality/Value: This study extend the existing debate on the relationship between macroeconomic variables and stock market liquidity in developed world to the emerging equity market. It also contributes by examining the impact of macroeconomic variables on the sectorial levels in equity market by using three proxies for stock market liquidity including, Amihud liquidity, average trading and trading volume.