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Article
Publication date: 16 July 2021

Sedighe Alizadeh, Mohammad Nabi Shahiki Tash and Johannes Kabderian Dreyer

This paper aims to study the impact of liquidity risk and transaction costs on stock pricing in Iran, a closed market operating under a financial embargo and compare the results…

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Abstract

Purpose

This paper aims to study the impact of liquidity risk and transaction costs on stock pricing in Iran, a closed market operating under a financial embargo and compare the results with those of an important neighboring market, namely, Turkey.

Design/methodology/approach

This study follows Liu et al. (2016) and incorporates liquidity risk and transaction costs into the traditional consumption-based asset-pricing model (CCAPM) from 2009 to 2017. Effective transaction costs are estimated a la Hasbrouck (2009) and liquidity risk according to eight different criteria.

Findings

According to the results, both liquidity risk and transaction costs are higher in Iran, possibly due to the financial embargo. Thus, relative to Turkey, this paper should expect a higher increase in the CCAPM pricing performance in Iran when accounting for these two variables. The results are in line with this expectation and indicate that adjusting the CCAPM significantly increases its pricing performance in both countries, but relatively more in Iran.

Originality/value

This study compares liquidity risk and transaction costs in an economy under the extreme case of a financial embargo to an open yet in other important aspects similar economy from the same region.

Details

Review of Accounting and Finance, vol. 20 no. 1
Type: Research Article
ISSN: 1475-7702

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