The Value of True Liquidity

73 Pages Posted: 2 Mar 2017  

Robin Borcherding

University of Duisburg-Essen

Michael Stein

University of Duisburg-Essen

Date Written: December 30, 2016

Abstract

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

Borcherding, Robin and Stein, Michael, The Value of True Liquidity (December 30, 2016). Available at SSRN: https://ssrn.com/abstract=2925772

Robin Borcherding

University of Duisburg-Essen ( email )

Universitätsstr. 12
Essen, 45117
Germany

Michael Stein (Contact Author)

University of Duisburg-Essen ( email )

Universitätsst. 12
Duisburg, 45117
Germany

HOME PAGE: http://www.fmoek.wiwi.uni-due.de/

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