Illiquidity and Stock Returns: Evidence from the 2007-2016 Period on the Stockholm Stock Exchange

Abstract: In this thesis, we study whether stock specific liquidity help explain stock return variations on the Stockholm Stock Exchange in Sweden over the years 2007-2016 by regressing excess stock return on liquidity, market excess returns, size and value variables. Furthermore, we investigate whether illiquidity premia have differed during the global financial crisis of 2007-2008, compared to four following two-year periods. Our results show that liquidity has not had a statistically significant effect on stock returns for the period of 2007-2016 as a whole. Regression results from the smaller time periods are inconsistent. During the financial crisis and 2011-2012, we find that illiquidity has had a statistically significant negative effect on stock returns. In 2013-2014 and 2015-2016, we find that illiquidity has had a statistically significant positive effect on stock returns. Due to difficulties of accurately measuring liquidity and the uncertainty of market dynamics in financial crises, we cannot conclude whether illiquidity truly has had a negative effect on returns, or if our results are affected by omitted variables and measurement errors. Methods of how to most accurately measure liquidity during both economically stable and unstable times needs to be examined in further research.