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The Diminishing Liquidity Premium

60 Pages Posted: 19 Mar 2008 Last revised: 2 Aug 2013

Azi Ben-Rephael

Indiana University - Kelley School of Business - Department of Finance

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Avi Wohl

Tel Aviv University - Coller School of Management

Date Written: May 1, 2013

Abstract

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.

Keywords: liquidity, illiquidity, liquidity premium, stock returns

JEL Classification: G12, G14

Suggested Citation

Ben-Rephael, Azi and Kadan, Ohad and Wohl, Avi, The Diminishing Liquidity Premium (May 1, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1099829 or http://dx.doi.org/10.2139/ssrn.1099829

Azi Ben-Rephael

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

HOME PAGE: http://www.kelley.iu.edu/finance/

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Avi Wohl (Contact Author)

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 6409051 (Phone)

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