Asset Pricing and the Illiquidity Premium

Posted: 16 Aug 2005

See all articles by H. Chan

H. Chan

University of Melbourne - Department of Finance; Monash University - Department of Accounting

Robert W. Faff

University of Queensland

Abstract

In this paper, we examine the asset-pricing role of liquidity (as proxied by share turnover) in the context of the Fama and French (1993) three-factor model. Our analysis employs monthly Australian data, covering the sample period from 1990 to 1998. The key finding of our research is that the main test is unable to reject the test of over-identifying restrictions, thus supporting the overall favorability of the liquidity augmented Fama-French model. In addition, we find that the asset- pricing performance of the liquidity factor is generally very robust to a wide range of sensitivity checks.

Keywords: asset pricing; liquidity; Fama-French model

JEL Classification: G12

Suggested Citation

Chan, Howard and Faff, Robert W., Asset Pricing and the Illiquidity Premium. The Financial Review, Vol. 40, No. 4, November 2005. Available at SSRN: https://ssrn.com/abstract=774545

Howard Chan

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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