| The momentum investment strategy has been immensely debated in finance literature. Researchers have failed to agree on the sources of momentum returns. One important gap in the literature was the relationship between liquidity and price momentum in emerging markets. In the absence of knowledge on the liquidity-momentum relationship, international investors would lack necessary tools for making sound investment decisions on portfolio diversification and profit maximization in emerging markets. The purpose of this inferential quantitative research was to evaluate how the dimensions of liquidity (i.e., trading volume, bid-ask spread, price impact, and turnover) were linked to price momentum in emerging markets. The Overconfidence behavioral theory was selected as the theoretical framework for this study since the theory considers the liquidity dimension as a contributor to the momentum returns. The theory was used to predict how the dimensions of liquidity could affect price momentum in emerging markets. The archival data of 92 emerging market ETFs between January 1, 2014 and December 31, 2016 were analyzed using correlational and multiple regression analysis. The results showed that there was a negative link between liquidity and momentum in emerging markets. Although the evidences provided by the individual coefficients (i.e., the four liquidity measurements) were not conclusive, the results showed that the correlation between the combination of the four dimensions of liquidity and price momentum was statistically significant. The findings indicated that investors were rewarded for taking on liquidity risk in emerging markets. Investors seeking to invest and/or maximize their returns in emerging markets might find the output from this study very useful in becoming more informed. Considering liquidity as a risk factor should bolster the investors' decisions on investing in emerging markets. The results of this study lent support to the sources of momentum since the results showed that liquidity contributed to price momentum in emerging markets. Furthermore, a new statistically significant asset pricing model was developed to identify the relationship between price momentum and asset liquidity. In the new model, momentum was listed as a dependent variable and liquidity measurements as explanatory variables. Future research could polish the model by introducing various explanatory variables, such as macroeconomic variables (i.e., GDP, interest rates, and inflation), adding risks (i.e., size, political risks, and government risk), and using multivariate regression. |
