Information Uncertainty and the Pricing of Liquidity
64 Pages Posted: 8 Jan 2013 Last revised: 1 Sep 2019
Date Written: August 1, 2019
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: Suggested Citation