ABSTRACT:

The liquidity/stock returns linkage was studied using data from the
First Section, the Second Section, and the Mothers Section of the Tokyo
Stock Exchange (TSE). In our overall tests, we found a significantly
negative (positive) relationship between liquidity (illiquidity) proxies
and returns. Upon exploring this further for the impact of business
cycles, we found that while the expansionary phases largely confirm
the overall finding, contractionary phases do not. When we controlled
for liquidity variability in the cross-sectional regressions, the role of
the liquidity level showed strong significance across business cycles,
different subperiods and all Sections of the TSE. With regard to
liquidity variability, we observed a strongly significant and negative
association with stock returns.