Information Uncertainty and the Pricing of Liquidity

64 Pages Posted: 8 Jan 2013 Last revised: 1 Sep 2019

See all articles by Wenjin Kang

Wenjin Kang

Renmin University of China - Hanqing Institute

Nan Li

National University of Singapore (NUS)

Huiping Zhang

James Cook University - College of Business, Law and Governance,

Date Written: August 1, 2019

Abstract

This study shows that, to obtain a precise measure of the liquidity premium in the stock market, it is important to recognize the influence of information uncertainty on the pricing of liquidity. Information uncertainty, which is positively correlated with stock illiquidity but negatively priced in the stock market, obscures the estimation of the liquidity premium. After controlling for its influence, we find that the liquidity premium is statistically significant and economically important in the U.S. stock market. Moreover, the risk-adjusted liquidity premium remains significant in both the earlier and more recent sub-sample periods. Our study addresses the recent debate about whether liquidity is still priced in recent decades, given the significant improvement in the trading technology and increase of the trading volume during this period.

Keywords: Liquidity, Information Uncertainty, Stock Return

JEL Classification: G12, G14

Suggested Citation

Kang, Wenjin and Li, Nan and Zhang, Huiping, Information Uncertainty and the Pricing of Liquidity (August 1, 2019). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2197648 or http://dx.doi.org/10.2139/ssrn.2197648

Wenjin Kang

Renmin University of China - Hanqing Institute ( email )

59 Zhongguancun Street
Beijing, 100872
China

Nan Li

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Huiping Zhang (Contact Author)

James Cook University - College of Business, Law and Governance, ( email )

Singapore
Singapore

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