Cross-Sectional Stock Returns in the UK Market: The Role of Liquidity Risk

Lu, Chensheng; Hwang, Soosung

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Cross-Sectional Stock Returns in the UK Market: The Role of Liquidity Risk

FORECASTING EXPECTED RETURNS, Butterworth-Heinemann, Forthcoming

36 Pages Posted: 15 Apr 2007

See all articles by Chensheng Lu

Soosung Hwang

Sungkyunkwan University - Department of Economics

Abstract

The relationship between liquidity and stock returns has been investigated extensively in recent years. Using the UK data, we show that there is a sizeable difference in the cross-sectional returns between liquid and illiquid assets. Liquidity together with book-to-market equity explains cross-sectional returns. Furthermore, the well-documented value premium can be explained by a liquidity-augmented CAPM, and this result is robust in the presence of distress factor and a battery of macroeconomic variables.

Keywords: Cross-Sectional Returns, Liquidity, Value Premium

JEL Classification: G10, G12

Suggested Citation: Suggested Citation

Lu, Chensheng and Hwang, Soosung, Cross-Sectional Stock Returns in the UK Market: The Role of Liquidity Risk. FORECASTING EXPECTED RETURNS, Butterworth-Heinemann, Forthcoming, Available at SSRN: https://ssrn.com/abstract=969809