A liquidity-augmented capital asset pricing model

Weimin Liu

Research output: Journal PublicationArticlepeer-review

387 Citations (Scopus)

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 languageEnglish
Pages (from-to)631-671
Number of pages41
JournalJournal of Financial Economics
Volume82
Issue number3
DOIs
Publication statusPublished - Dec 2006
Externally publishedYes

Keywords

  • Liquidity factor
  • Liquidity premium
  • Trading speed

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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