The Diminishing Liquidity Premium
Indiana University - Kelley School of Business, Department of Finance
Washington University in Saint Louis - John M. Olin Business School
Tel Aviv University - Faculty of Management
May 1, 2013
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
Stock liquidity has improved over the recent four decades. This improvement was accompanied by a dramatic increase in trading activity. The net effect on the liquidity premium is ambiguous. We show that the characteristic liquidity premium of U.S. stocks has significantly declined over the past four decades. In recent time periods characteristic liquidity is significantly priced only for the smallest common stocks. This decline stems from an improvement in liquidity, and from a lower sensitivity of expected returns to liquidity. By contrast, systematic liquidity has not been trending down, and is still significantly priced primarily among NASDAQ stocks.
Number of Pages in PDF File: 60
Keywords: liquidity, illiquidity, liquidity premium, stock returns
JEL Classification: G12, G14working papers series
Date posted: March 19, 2008 ; Last revised: August 2, 2013
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