International Finance · 2001 · 385 citations · 22 references
BusinessEconomicsFinanceFinancial EconomicsInvestment ManagementPortfolio ManagementInvestmentLiquidityLiquidity RiskMarket LiquidityPortfolio TheoryVolatility AnalysisEquity Issuance CostsFinancial Market VolatilityInternational Portfolio ChoiceInternational Portfolio InvestmentLiquidity Effects On ReturnsMarket Volatility EffectsPortfolio ControlPrice Volatility Effects
Actual investment performance reflects both the portfolio manager’s strategy and the execution costs incurred, which can dramatically reduce returns, especially in illiquid markets. The study examines how cost, liquidity, turnover, and volatility interact and affect equity returns using panel data from 42 countries between 1996 and 1998. The authors use panel data from 42 countries (1996‑1998) to analyze the inter‑relationships among turnover, equity trading costs, volatility, and their impact on equity returns. The study finds that trading costs vary widely across countries, with emerging markets incurring higher costs, and that higher volatility reduces expected returns through costs but also lowers turnover, partially offsetting the cost effect; turnover is inversely related to costs, and incorporating cost and turnover markedly alters the composition of global efficient portfolios.
Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity and volatility, and analyses their determinants using panel data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets, in particular, have significantly higher trading costs even after correcting for factors such as market capitalization and volatility. We analyse the inter‐relationships between turnover, equity trading costs and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolio’s expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account.
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Time‐Varying World Market Integration
Geert Bekaert, Campbell R. Harvey · The Journal of Finance · 1995 · 2.1K citations · Full text