Measuring liquidity in emerging markets

• We propose a modified version of the Amihud illiquidity measure.
• It outperforms other low-frequency liquidity proxies in emerging markets.
• The improvement is significant in less active markets and for low-turnover stocks.
• Liquidity in emerging markets can be improved by better information environment.

We propose a modified version of the Amihud illiquidity measure, AdjILLIQ, which performs well in different types of emerging markets. Our AdjILLIQ measure combines the virtues of the original Amihud ratio and the non-trading-frequency measure. It exhibits higher correlation with spread and price impact than other existing low-frequency liquidity measures in most of our sample markets. The improvement gained from using our AdjILLIQ measure is particularly significant in inactively-traded markets and low-turnover stocks. We find that the liquidity in emerging markets, as measured by AdjILLIQ, can be improved by better disclosure and less information asymmetry. Furthermore, the liquidity dry-up during market downturns can also be alleviated by better information environment.