Abstract

Liquidity is the pre-condition for a well-functioning and efficient market. Liquidity can be perceived, but difficult to measure due to its multi-dimensional characteristics. Studies have discussed various characteristics of liquidity and its influencing power on return and asset pricing. The article has considered Indian MidCap stocks and measured its liquidity using Amihud and trading volume as proxies. It has found Indian MidCap stocks have varying degree of liquidity. During the intraday, MidCap stocks have L-shaped liquidity pattern. The article observed that P-E ratio, P-B ratio, Dividend Yield and Index of Industrial Production are the significant determinants of liquidity. The article has estimated liquidity betas and carried out Granger non-causality test to articulate its relation with CAPM beta. The article has also found stability of liquidity beta across MidCap stocks. The liquidity betas of MidCap stocks have time-varying volatility. Relative Strength Index (RSI) and Change in Trading Volume are exogenous variables in explaining the time-varying volatility of beta. The study observed that MidCap stocks are claiming liquidity premium and liquidity premium is influencing the asset pricing along with WML, HML and EMR factors.

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