Liquidity and stock price volatility : evidence from the Greek Stock Market

Abstract

The main purpose of this paper is to examine the relationship between liquidity and stock return volatility in the Greek stock market. The motivation for this study was provided by the growing interest in liquidity that has emerged in the asset pricing literature over recent years. We use five measures of liquidity in order to investigate the relation between liquidity and the volatility of share prices. The one proposed by Pastor and Stambaugh (2001) is associated with the strength of volume-related return reversals, the second is the illiquidity ratio, as employed by Amihud (2002), which is defined as the daily ratio of absolute stock return to its dollar volume, averaged over some period, the third is the turnover rate proposed by Datar, Naik and Radcliffe (1998), which is defined as the number of shares traded divided by the number of shares outstanding in the stock and last is the standardized turnover LM1 and LM12 liquidity measure proposed by Liu (2006).Then we test how stock return volatility is influenced when each of the five liquidity proxies is included in the conditional variance equation of the GARCH model and in the linear statistical model of the GMM estimation method.