Liquidity Risk and the Beta Premium

40 Pages Posted: 23 Dec 2019

See all articles by Cynthia M Gong

Cynthia M Gong

School of Business and Economics, Loughborough University

Di Luo

University of Southampton

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: December 19, 2019

Abstract

As opposed to the “low beta low risk” convention, we show that low beta stocks are illiquid and exposed to high liquidity risk. After adjusting for liquidity risk, low beta stocks no longer outperform high beta stocks. Although investors who “bet against beta” earn a significant beta premium under the Fama-French three- or five-factor models, this strategy fails to generate any significant returns when liquidity risk is accounted for. Our work helps understand the beta premium from a new liquidity-risk perspective, and draws useful implications for both fund and corporate managers.

Keywords: Liquidity risk; Beta premium; Cross-sectional stock returns

JEL Classification: G12; G14; G30

Suggested Citation

Gong, Cynthia and Luo, Di and Zhao, Huainan, Liquidity Risk and the Beta Premium (December 19, 2019). Available at SSRN: https://ssrn.com/abstract=3506874 or http://dx.doi.org/10.2139/ssrn.3506874

Cynthia Gong

School of Business and Economics, Loughborough University ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

Di Luo (Contact Author)

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Huainan Zhao

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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