The Diminishing Liquidity Premium

Azi Ben-Rephael, Ohad Kadan, Avi Wohl

Research output: Contribution to journalArticlepeer-review

48 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)197-229
Number of pages33
JournalJournal of Financial and Quantitative Analysis
Volume50
Issue number1-2
DOIs
StatePublished - Jul 14 2015
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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