Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
50 Pages Posted: 4 Nov 2008
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Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
Date Written: 2000
Abstract
New tests are presented on the effects of stock illiquidity on stock return. Over time, expected market illiquidity positively affects ex ante stock excess return (usually called â¬Srisk premiumâ¬?). This complements the positive cross-sectional return-illiquidity relationship. The illiquidity measure hereis the average daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firms stocks, suggesting an explanation for the changes â¬Ssmall firm effectâ¬? over time. The impact ofmarket illiquidity on stock excess return suggests the existence of illiquidity premium and helps explain the equity premium puzzle.
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