Abstract
Using a new measure of liquidity, this paper documents a significant liquidity premium robust to the CAPM and the Fama-French three-factor model and shows that liquidity is an important source of priced risk. A two-factor (market and liquidity) model well explains the cross-section of stock returns, describing the liquidity premium, subsuming documented anomalies associated with size, long-term contrarian investment, and fundamental (cashflow, earnings, and dividend) to price ratios. In particular, the two-factor model accounts for the book-to-market effect, which the Fama-French three-factor model fails to explain.
Original language | English |
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Pages (from-to) | 631-671 |
Number of pages | 41 |
Journal | Journal of Financial Economics |
Volume | 82 |
Issue number | 3 |
DOIs | |
Publication status | Published - Dec 2006 |
Externally published | Yes |
Keywords
- Liquidity factor
- Liquidity premium
- Trading speed
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management