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

Abstract

This paper replicates and extends the Amihud (2002) study that links liquidity to asset pricing. Using the current version of the CRSP dataset, we obtain essentially the same results that Amihud presents. The same methods applied to more recent data show a much weaker relation between liquidity and asset pricing. Finally, we compare the explanatory power of Amihud’s illiquidity measure to that of other simple measures that use the same data for their calculation. We find that the Amihud illiquidity measure is no better than substantially simpler measures.

Keywords: Liquidity, illiquidity, Amihud measure, asset pricing

JEL Classification: G12, G10