Effect of Exchange Rate Risk on Market Liquidity Risk in Tehran Stock Exchange

Market liquidity risk is a crucial factor in asset valuation, and understanding the influential factors on liquidity risk holds paramount importance. One of the key influential factors is exchange rate risk, a dimension often overlooked in the existing literature. The objective of this research is to investigate the impact of exchange rate risk on equity market liquidity risk. The study utilizes quarterly data from selected stocks of 32 companies listed on the stock exchange during the years 1386-1400. The liquidity risk is extracted using the Amihud measure (2002), and the risk is calculated through the detrended method. Various dynamic panel data models are employed for estimations, controlling for the effects of exchange rate risk alongside other explanatory variables, including market excess return, product prices, risk-free return, size, and book-to-market ratio. Results from the generalized method of moments (GMM) estimator indicate that an increase in exchange rate risk leads to an elevation in equity market liquidity risk. Additionally, market excess return and the book-to-market ratio exhibit positive effects, while product prices, risk-free return, and size show negative impacts on equity market liquidity risk. The degree of stickiness in liquidity risk is found to be minimal based on the dynamics of the model, and seasonal shocks have limited effects on equity market liquidity risk, suggesting a high level of stability.