The Value of True Liquidity
73 Pages Posted: 2 Mar 2017
Date Written: December 30, 2016
This study uncovers the ability of liquid stocks to generate significant higher risk-adjusted portfolio returns than their illiquid counterparts. Using U.S. stocks in the period of 01/1990 to 09/2015, we show that a significant negative illiquidity premium can be obtained when accounting for a high negative correlation between a stocks’ illiquidity and its market value of equity. The risk-adjusted orthogonalized illiquidity premium amounts to -0.576% per month and is robust to changes in the portfolio formation setting.
Keywords: Liquidity, asset pricing
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation