The Effect of Local Participation on Market Pricing and Liquidity: Evidence from an Emerging Market

This study aimed to investigate the relationship between local stock market participation and market return-liquidity from the perspective of an emerging market—Turkey. In this context, the main research question is how investor attendance at different wealth levels influences market returns and liquidity. It is an established assumption that as wealth increases, the probability of being a rational investor also increases. We, because of multicollinearity in our models, employed statistical shrinkage methods-Ridge Regression, Lasso Regression, and Elastic Net Regression. While groups with low-level wealth were found to be the most important determinants for market liquidity, they were not predictors of market return. However, wealthier investors had positive coefficients in stock return models. Robustness tests confirmed the previous findings. These findings imply that those who consider investing in capital markets should have a long-run investment horizon; otherwise, they cannot sustain their presence in the market, as demonstrated in this paper. This is the first study to analyze the impact of retail investors on both stock market return and liquidity using nationwide data.