Characteristic Liquidity, Systematic Liquidity and Expected Returns

43 Pages Posted: 20 Aug 2011 Last revised: 17 Aug 2014

See all articles by Reza Bradrania

Reza Bradrania

University of South Australia - UniSA Business School

Maurice Peat

The University of Sydney; Financial Research Network (FIRN)

Date Written: February 12, 2013

Abstract

We investigate whether the effect of liquidity on equity returns can be attributed to the liquidity level, as a stock characteristic, or a market wide systematic liquidity risk. We develop a CAPM liquidity-augmented risk model and test the characteristic hypothesis against the systematic risk hypothesis for the liquidity effect. We find that the two-factor systematic risk model explains the liquidity premium, and the null hypothesis that the liquidity characteristic is compensated irrespective of liquidity risk loadings is rejected. This result is robust over 1931-2008 data and sub-samples of pre-1963 and post-1963 data both in the time-series and the cross-sectional analysis.

Keywords: Liquidity systematic risk, Liquidity characteristic, Asset pricing, Transaction costs

JEL Classification: G0, G1, G12, G120

Suggested Citation

Bradrania, Reza and Peat, Maurice, Characteristic Liquidity, Systematic Liquidity and Expected Returns (February 12, 2013). Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1913152 or http://dx.doi.org/10.2139/ssrn.1913152

Reza Bradrania (Contact Author)

University of South Australia - UniSA Business School ( email )

Adelaide, South Australia 5001
Australia

Maurice Peat

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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