Illiquidity and Stock Returns: Cross-Section and Time-Series Effects

50 Pages Posted: 13 Nov 2008

See all articles by Yakov Amihud

Yakov Amihud

New York University - Stern School of Business

Multiple version iconThere are 2 versions of this paper

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 here is 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 of market illiquidity on stock excess return suggests the existence of illiquidity premium and helps explain the equity premium puzzle.

Suggested Citation

Amihud, Yakov, Illiquidity and Stock Returns: Cross-Section and Time-Series Effects (2000). NYU Working Paper No. S-AM-00-10. Available at SSRN: https://ssrn.com/abstract=1300798

Yakov Amihud (Contact Author)

New York University - Stern School of Business ( email )

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