Abstract

http://ssrn.com/abstract=1361260
 
 

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Liquidity and Expected Returns in a Multi-Factor Asset Pricing Model


Jan Schneider


University of Texas at Austin - Department of Finance

September 30, 2010


Abstract:     
Several empirical studies find that illiquid firms have higher expected returns than liquid firms. I argue that this result is a puzzle that has not been resolved yet. The liquidity premium is puzzling since investors can circumvent low liquidity by trading diversified funds of illiquid firms. I develop a model that shows how a combination of cross-sectional differences in liquidity and short sale constraints generates a risk premium for illiquid firms despite the ability of investors to trade illiquid firms in large liquid baskets.

Number of Pages in PDF File: 55

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Date posted: March 17, 2009 ; Last revised: October 6, 2010

Suggested Citation

Schneider, Jan, Liquidity and Expected Returns in a Multi-Factor Asset Pricing Model (September 30, 2010). Available at SSRN: http://ssrn.com/abstract=1361260 or http://dx.doi.org/10.2139/ssrn.1361260

Contact Information

Jan Schneider (Contact Author)
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
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