Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-12-03T19:42:56.041Z Has data issue: false hasContentIssue false
  • English
  • Français

The Diminishing Liquidity Premium

Published online by Cambridge University Press:  08 June 2015

Azi Ben-Rephael ,
Ohad Kadan  and
Avi Wohl
Azi Ben-Rephael
Affiliation:
[email protected], Indiana University, Kelley School of Business, Bloomington, IN 47405
Ohad Kadan
Affiliation:
[email protected], Washington University in St. Louis, Olin Business School, St. Louis, MO 63130
Avi Wohl*
Affiliation:
[email protected], Tel Aviv University, Recanati Graduate School of Business Administration, Tel Aviv 69978, Israel.
*
*Corresponding author: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Stock liquidity has improved over the recent 4 decades. This improvement was accompanied by a dramatic increase in trading activity. The net effect on the liquidity premium is ambiguous. We show that the characteristic liquidity premium of U.S. stocks has significantly declined over the past 4 decades. In recent years, characteristic liquidity is significantly priced only for the smallest common stocks. This decline stems from an improvement in liquidity and from a lower sensitivity of expected returns to liquidity. By contrast, systematic liquidity has not been trending down and is still significantly priced primarily among NASDAQ stocks.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 1-2 , April 2015 , pp. 197 - 229
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acharya, V. V., and Pedersen, L. H.. “Asset Pricing with Liquidity Risk.” Journal of Financial Economics, 77 (2005), 375–410.CrossRefGoogle Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Amihud, Y., and Mendelson, H.. “Asset Pricing and the Bid-Ask Spread.” Journal of Financial Economics, 17 (1986), 223–249.CrossRefGoogle Scholar
Amihud, Y., and Mendelson, H.. “The Effects of Beta, Bid-Ask Spread, Residual Risk and Size on Stock Returns.” Journal of Finance, 44 (1989), 479–486.Google Scholar
Ang, A.; Hodrick, R. J.; Xing, Y.; and Zhang, X.. “High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence.” Journal of Financial Economics, 91 (2009), 1–23.CrossRefGoogle Scholar
Ang, A.; Shtauber, A.; and Tetlock, P.. “Asset Pricing in the Dark: The Cross Section of OTC Stocks.” Review of Financial Studies, 26 (2013), 2985–3028.CrossRefGoogle Scholar
Asparouhova, E.; Bessembinder, H.; and Kalcheva, I.. “Liquidity Biases in Asset Pricing Tests.” Journal of Financial Economics, 96 (2010), 215–237.CrossRefGoogle Scholar
Atkins, A., and Dyl, E.. “Market Structure and Reported Trading Volume: Nasdaq versus the NYSE.” Journal of Financial Research, 20 (1997), 291–304.CrossRefGoogle Scholar
Baker, M., and Stein, J. C.. “Market Liquidity as a Sentiment Indicator.” Journal of Financial Markets, 7 (2004), 271–299.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; and Lundblad, C.. “Liquidity and Expected Returns: Lessons from Emerging Markets.” Review of Financial Studies, 20 (2007), 1783–1831.CrossRefGoogle Scholar
Blume, M., and Stambaugh, R.. “Biases in Computed Returns: An Application to the Size Effect.” Journal of Financial Economics, 12 (1983), 387–404.CrossRefGoogle Scholar
Brennan, M. J.; Chordia, T.; and Subrahmanyam, A.. “Alternative Factor Specifications, Security Characteristics, and the Cross-Section of Expected Stock Returns.” Journal of Financial Economics, 49 (1998), 345–373.CrossRefGoogle Scholar
Brennan, M.; Huh, S.; and Subrahmanyam, A.. “An Analysis of the Amihud Illiquidity Premium.” Review of Asset Pricing Studies, 3 (2013), 133–176.CrossRefGoogle Scholar
Brennan, M. J., and Subrahmanyam, A.. “Market Microstructure and Asset Pricing: On the Compensation for Illiquidity in Stock Returns.” Journal of Financial Economics, 41 (1996), 441–464.CrossRefGoogle Scholar
Brunnermeier, M. K., and Pedersen, L. H.. “Market Liquidity and Funding Liquidity.” Review of Financial Studies, 22 (2009), 2201–2238.CrossRefGoogle Scholar
Charoenrook, A., and Conrad, J. S.. “Identifying Risk-Based Factors.” Working Paper, SSRN 757210 (2008).Google Scholar
Cherkes, M.; Sagi, J.; and Stanton, R.. “A Liquidity-Based Theory of Closed-End Funds.” Review of Financial Studies, 22 (2009), 257–297.CrossRefGoogle Scholar
Chordia, T.; Huh, S.; and Subrahmanyam, A.. “Theory-Based Illiquidity and Asset Pricing.” Review of Financial Studies, 22 (2009), 3629–3668.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Recent Trends in Trading Activity and Market Quality.” Journal of Financial Economics, 101 (2011), 243–263.CrossRefGoogle Scholar
Chordia, T.; Subrahmanyam, A.; and Anshuman, R. V.. “Trading Activity and Expected Stock Returns.” Journal of Financial Economics, 59 (2001), 3–32.CrossRefGoogle Scholar
Chordia, T.; Subrahmanyam, A.; and Tong, Q.. “Trends in Capital Markets Anomalies.” Working Paper, SSRN 2029057 (2013).Google Scholar
Constantinides, G. M. “Capital Market Equilibrium with Transaction Costs.” Journal of Political Economy, 94 (1986), 842–862.CrossRefGoogle Scholar
Dichev, I. D. “Is the Risk of Bankruptcy a Systematic Risk?” Journal of Finance, 53 (1998), 1131–1147.CrossRefGoogle Scholar
Dimson, E.; Marsh, P.; and Staunton, M.. “Global Evidence on the Equity Risk Premium.” Journal of Applied Corporate Finance, 15 (2003), 8–19.CrossRefGoogle Scholar
Eleswarapu, V. R. “Cost of Transacting and Expected Returns in the Nasdaq Market.” Journal of Finance, 52 (1997), 2113–2127.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return and Equilibrium Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Florackis, C.; Gregoriou, A.; and Kostakis, A.. “Trading Frequency and Asset Pricing on the London Stock Exchange: Evidence from a New Price Impact Ratio.” Journal of Banking and Finance, 35 (2011), 3335–3350.CrossRefGoogle Scholar
Gorton, G. B., and Pennacchi, G. G.. “Security Baskets and Index-Linked Securities.” Journal of Business, 66 (1993), 1–27.CrossRefGoogle Scholar
Goyenko, R. Y.; Holden, C. W.; and Trzcinka, C. A.. “Do Liquidity Measures Measure Liquidity?” Journal of Financial Economics, 92 (2009), 153–181.CrossRefGoogle Scholar
Harris, L. Trading and Exchanges. Oxford, UK: Oxford University Press (2003).Google Scholar
Hasbrouck, J. “Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data.” Journal of Finance, 64 (2009), 1445–1477.CrossRefGoogle Scholar
Jang, B.; Koo, H. K.; Liu, H.; and Loewenstein, M.. “Liquidity Premia and Transaction Costs.” Journal of Finance, 62 (2007), 2329–2366.CrossRefGoogle Scholar
Kamara, A.; Lou, X.; and Sadka, R.. “The Divergence of Systematic Liquidity and the Cross-Section of Stock Returns.” Journal of Financial Economics, 89 (2008), 444–466.CrossRefGoogle Scholar
Korajczyk, R. A., and Sadka, R.. “Pricing the Commonality Across Alternative Measures of Liquidity.” Journal of Financial Economics, 87 (2008), 45–72.CrossRefGoogle Scholar
Kyle, A. S. “Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 1315–1335.CrossRefGoogle Scholar
Levy, A., and Swan, P.. “The Liquidity Component of the Equity Premium.” Working Paper, SSRN 1102115 (2008).CrossRefGoogle Scholar
Lynch, A., and Tan, S.. “Explaining the Magnitude of Liquidity Premia: The Role of Return Predictability, Wealth Shocks, and State-Dependent Transaction Costs.” Journal of Finance, 66 (2011), 1329–1368.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Pastor, L., and Stambaugh, R.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642–685.CrossRefGoogle Scholar
Pontiff, J., and Woodgate, A.. “Shares Issuance and Cross-Sectional Returns.” Journal of Finance, 43 (2008), 921–945.CrossRefGoogle Scholar
Roll, R. “A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market.” Journal of Finance, 39 (1984), 1127–1139.Google Scholar
Sadka, R. “Momentum and Post-Earnings-Announcement Drift Anomalies: The Role of Liquidity Risk.” Journal of Financial Economics, 80 (2006), 309–349.CrossRefGoogle Scholar
Schwert, G. W. “Anomalies and Market Efficiency.” In Handbook of the Economics of Finance, Constantinides, G. M., Harris, M., and Stulz, R., eds. Amsterdam, The Netherlands: Elsevier Science (2003).Google Scholar
Shumway, T. “The Delisting Bias in CRSP Data.” Journal of Finance, 52 (1997), 327–340.CrossRefGoogle Scholar
Subrahmanyam, A. “A Theory of Trading in Stock Index Futures.” Review of Financial Studies, 4 (1991), 17–51.CrossRefGoogle Scholar
Vayanos, D. “Transaction Costs and Asset Prices: A Dynamic Equilibrium Model.” Review of Financial Studies, 11 (1998), 1–58.CrossRefGoogle Scholar