Do Uncertainty, Liquidity and Trading Activity Drive Stock Market Returns?

Christos Floros

Department of Accounting and Finance,

Hellenic Mediterranean University, Heraklion, Greece.

Email: cfloros@hmu.gr

Abstract

This study examines the impact of market uncertainty, oil market uncertainty, economic policy uncertainty, market liquidity and trading activity on daily stock returns in the United States and European markets. We investigate whether uncertainty and market liquidity (turnover) as well as trading activity (volume) jointly explain stock return dynamics. The study evaluates the extent to which uncertainty shocks affect stock market performance as well as liquidity moderates the impact of uncertainty on returns. The findings are expected to show that increases in market uncertainty are associated with lower returns, whereas trading volume and turnover reflect liquidity conditions that may either amplify or mitigate these effects. The study contributes to the literature by integrating multiple sources of uncertainty with trading activity and liquidity in a empirical framework using daily data for a long period. The results provide insights for investors, portfolio managers, and policymakers seeking to understand how uncertainty, market liquidity and trading activity influence stock market performance.

Keywords: uncertainty, trading volume, turnover, stock markets, US, EU