The impact of market fundamentals and financial crisis on the liquidity of banks and stock markets: evidence from Jordanian investors

This research investigates the impact of market fundamentals like the time deposit interest rates (TDIR), the market-to-book value ratio (M/BV), the price to earnings ratio (P/E) and the inflation as captured by the consumer price index (CPI) in the decisions of Jordanian investors. The study also focuses on assessing the impacts of the 2007/8 financial crisis in the decisions of Jordanian investors, over the period Q1/2000-Q4/2014. In this research investors’ decisions are mainly captured by using both the liquidity of the Jordanian commercial banks, and the Amman Stock Exchange. However, after discussing the available literature, the study found that though the economy of Jordan fluctuates considerably, there is no previous research addressed the impact of the fluctuations in the TDIR, M/BV ratio, P/E ratio and the CPI (Market Fundamentals) in the perception of Jordanian investors as measured by the liquidity of banks and the Amman Stock Exchange. Thus, through filling this gap in literature, the study expects to provide investors and decision makers with important information regarding the role of market fundamentals in the process of decision making. Additionally, the study will suggest a framework to help investors to rationalise their decisions, during both the tranquil and the unstable financial periods. Moreover, to accomplish the core aim of this research, the study formulates four main hypotheses. The first hypothesis postulates that the fluctuations in market fundamentals like the TDIR, M/BV, P/E and the CPI are significantly affecting the decisions of Jordanian investors. The second hypothesis assumes a long-run integration between the fluctuations in market fundamentals along with the decisions of Jordanian investors. The third hypothesis postulates a long and short-run causality that is running from the volatility in the TDIR, M/BV ratio, P/E ratio and the inflation towards the decisions of Jordanian investors. The fourth hypothesis suggests that pre, during or post the crisis period, there are no significant differences between investors’ decisions, due to the effects of the fluctuations in market fundamentals. However, to test these hypotheses, the current research employs a time series data those are mainly drawn from the official sites of the Amman Stock Exchange, the Central Bank of Jordan, the department of statistics and the Jordanian commercial banks. Thus, since the using of time series data leads to get spurious regression results, the ADF was applied in order to check for data stationarity and to avoid the problem of getting spurious regression results. Consequently, the results revealed that only after adding the first difference, the variables became stationary. Thereafter, results from the regression tests reported that the decisions of Jordanian investors are not impacted by the volatility in the TDIR, M/BV and P/E ratio. However, the findings showed that the volatility in the CPI is significantly impacting the decisions of Jordanian investors as measured by the turnover ratio, trading volume and the number of transaction. After that the study applied the Johansen Co-integration, the VECM and the Wald tests in order to check if there are long or short-run correlations between the examined variables. As a result, the findings showed that investors of Jordan rely on the liquidity of banks in order to evaluate the market’s liquidity as captured by the trading volume. Additionally, the results revealed that investors of Jordan prefer to employ their funds into the banks when the ratio of M/BV, P/E, TDIR and the CPI are high. By contrast, the market- to-book value and the price to earnings ratios are found to be negatively correlating with the market’s liquidity as captured by the number of transactions. Furthermore, findings from the Wald tests revealed that there is no short-run correlation between the TDIR, M/BV, P/E or the CPI along with investors’ decisions as measured by the total loans to total deposits. However, the study found that on the short-run investors of Jordan behave rationally towards the fluctuations in market fundamentals like the TDIR, M/BV, P/E and the CPI. Beyond that, the findings showed that the 2007/8 financial crisis was weakly impacted investors’ behaviour as captured by the liquidity of banks and the Amman Stock Exchange. Moreover, the study concluded that during the crisis period investors of Jordan became more rational, but before the crisis period they found to be risk seekers. The study also concluded that in the long-run investors of Jordan behave rationally towards the volatility in the TDIR, M/BV, P/E and the CPI, as well as they relied on the market’s liquidity in order to evaluate the liquidity of banks. However, on the short-run investors of Jordan did not rely on the liquidity of the Amman Stock Exchange in order to evaluate the liquidity of banks. Through relying on the results of this research, the study recommended investors of Jordan to use market fundamentals like the TDIR, M/BV, P/E and the CPI in order to make rational investment decisions. Furthermore, the findings of this research are expected to contribute in helping investors to enhance the process of making rational investment decisions, as well as extending the available literature, which is focused on investors’ decisions and saving behaviour.