Liquidity risk, transaction costs and financial closedness: lessons from the Iranian and Turkish stock markets

Purpose This paper aims to study the impact of liquidity risk and transaction costs on stock pricing in Iran, a closed market operating under a financial embargo and compare the results with those of an important neighboring market, namely, Turkey. Design/methodology/approach This study follows Liu...

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Bibliographic Details
Published inReview of accounting & finance Vol. 20; no. 1; pp. 84 - 102
Main Authors Alizadeh, Sedighe, Shahiki Tash, Mohammad Nabi, Kabderian Dreyer, Johannes
Format Journal Article
LanguageEnglish
Published Patrington Emerald Publishing Limited 29.07.2021
Emerald Group Publishing Limited
Subjects
Consumption
Costs
Economic growth
Equity
Hypotheses
Liquidity
New stock market listings
Rates of return
Securities markets
Securities prices
Stock exchanges
Iran
United States > US
Turkey
Financial embargo
Financial closedness and openness
Transaction costs
Liquidity risk
Consumption risk
Asset pricing
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Summary:Purpose This paper aims to study the impact of liquidity risk and transaction costs on stock pricing in Iran, a closed market operating under a financial embargo and compare the results with those of an important neighboring market, namely, Turkey. Design/methodology/approach This study follows Liu et al. (2016) and incorporates liquidity risk and transaction costs into the traditional consumption-based asset-pricing model (CCAPM) from 2009 to 2017. Effective transaction costs are estimated a la Hasbrouck (2009) and liquidity risk according to eight different criteria. Findings According to the results, both liquidity risk and transaction costs are higher in Iran, possibly due to the financial embargo. Thus, relative to Turkey, this paper should expect a higher increase in the CCAPM pricing performance in Iran when accounting for these two variables. The results are in line with this expectation and indicate that adjusting the CCAPM significantly increases its pricing performance in both countries, but relatively more in Iran. Originality/value This study compares liquidity risk and transaction costs in an economy under the extreme case of a financial embargo to an open yet in other important aspects similar economy from the same region.
ISSN:1475-7702
1758-7700
DOI:10.1108/RAF-04-2020-0102