Pricing To Market Liquidity: A Test On The Borsa Istanbul

Purpose: This study searches if market liquidity impacts the stock market prices and forecasts excess returns for Borsa Istanbul. Design/Methodology: The six factors’ effects over the market are tested. The factors are market return factor, size factor, default premium, term premium, market liquidity, and marketto-book values.The data set covers 130 monthly data of the fifty-seven stocks of BIST100 index. The research period is delimitated from January of 2011 to October of 2021. Findings: The market liquidity is significant for the returns over the research period. The market was sensitive to the liquidity in the long-term. It is the most important factor for the prices. The market liquidity and price relation is positive in the long-term, whereas it is negative in the short-term. Even though the liquidity is significant for the short-term, the market didn’t price the liquidity. Its effects on the returns are significant both for the short and long-term. However, those effects are limited. Limitations: The model tested for stocks that traded on BIST100 index which is one of emerging markets. The results may be dissimilar for less liquid stocks and for different markets. Originality/Value: The price effect of market liquidity for stocks is conditional and the excess return changes because of liquidity around the zero. Though liquidity risk is a risk factor for the markets. Some internal and external factors may affect the liquidity’s power over the market. Those results should be taken attention by markets and investors.