INVESTIGATION OF STOCK ILLIQUIDITY ON CENTRAL AND SOUTH EAST EUROPEAN MARKETS IN NAIVE PORTFOLIO FRAMEWORK

This paper questions existence of illiquidity premium on 8 Central and South East European stock markets. Using the ILLIQ illiquidity measure proposed by Amihud (2002) we investigate liquidity of each stock. Naive portfolio diversification is applied in forming liquidity sorted portfolios. These portfolios were formed using daily data in the half-year period and in the second part of analysis by using daily data within one month. Performance of these portfolios was observed in the half-year period out of the sample. This approach gave additional information pointing that each period had different set of stocks which were defined as less or more liquid. Contrary to previous researches we could not confirm existence of illiquidity premium on these stock markets since stock returns of illiquid portfolio and liquid portfolio do not show statistically significant difference in case of all eight countries and all observed portfolios. In addition, we conducted detailed analysis for Poland and Bulgaria using monthly data. These results confirmed previous findings suggesting that observation of liquidity has no impact on portfolio return in the next month.