Investor risk tolerance for liquidity risk in capital markets: Applications in different markets

This study researches the effects of investors' risk tolerance over capital market liquidity for periods from 01/ 01/ 2008 to 08/ 30/ 2019. in thirteen countries' capital markets which have different development level. Capital markets are grouped into two groups as developed and developing countries' capital markets depending on the classification of developed and developing countries made by International Monetary Fund (IMF). The Amihud (2002) illiquidity ratio was used to determined liquidity level of the eeach markets and Froot&Connell (2003) risk tolerance index was used to appraise the investors' risk tolerance. In this study, as market liquidity is dependent and risk tolerance is independent variable, Westerlund cointegration test, Pesaran CCE cointegration coefficient estimation test and Demitrescu-Hurlin causality tests were applied to testimony the relationship between those two variables. As the results of the analyzes, cointegration was found between investor risk tolerance and market liquidity, but cointegration regression coefficients could only be estimated just for the USA, UK and Indonesia stock markets within the confidence intervals. For the other countries in the sample, the estimated cointegration regression coefficients were outside the confidence interval. As a result of causality test, no causality relationship was found between market liquidity and investor risk tolerance. Key Words: Market liquidity, Liquidity risk, Risk tolerance