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The Importance Of Liquidity As A Factor In Asset Pricing

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  • Marvin A. Keene
  • David R. Peterson

Abstract

We employ the Fama‐French time‐series regression approach to examine liquidity as a risk factor affecting stock returns. Prior studies establish liquidity as an important consideration in investment decisions. Here, liquidity is found to be an important factor affecting portfolio returns, even after the effects of market, size, book‐to‐market equity, and momentum are considered. Nonzero intercepts remain, however, indicating continued missing risk factors.

Suggested Citation

  • Marvin A. Keene & David R. Peterson, 2007. "The Importance Of Liquidity As A Factor In Asset Pricing," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 30(1), pages 91-109, March.
    • Handle: RePEc:bla:jfnres:v:30:y:2007:i:1:p:91-109
    DOI: 10.1111/j.1475-6803.2007.00204.x
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    Cited by:

    1. Dey, Malay K. & Wang, Chaoyan, 2012. "Return spread and liquidity: Evidence from Hong Kong ADRs," Research in International Business and Finance, Elsevier, vol. 26(2), pages 164-180.
    2. Márcio André Veras Machado & Márcia Reis Machado, 2014. "Liquidity and asset pricing:evidence from the Brazilian market," Brazilian Business Review, Fucape Business School, vol. 11(1), pages 69-89, January.
    3. Raphael Moses Roquete & Ricardo P. C. Leal & Carlos Heitor Campani, 2018. "Corporate governance and fundamental indexation in Brazil," Economics Bulletin, AccessEcon, vol. 38(3), pages 1494-1504.
    4. Moshirian, Fariborz & Qian, Xiaolin & Wee, Claudia Koon Ghee & Zhang, Bohui, 2017. "The determinants and pricing of liquidity commonality around the world," Journal of Financial Markets, Elsevier, vol. 33(C), pages 22-41.
    5. Márcio André Veras Machado & Otávio Ribeiro de Medeiros, 2012. "Does the liquidity effect exist in the brazilian stock market?," Brazilian Business Review, Fucape Business School, vol. 9(4), pages 27-50, October.
    6. Fu, Chengbo & Huang, Qiping & Tang, Hongfei, 2022. "Do ETFs affect ADRs and U.S. domestic stocks differently?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    7. Frestad, Dennis, 2012. "Liquidity and dirty hedging in the Nordic electricity market," Energy Economics, Elsevier, vol. 34(5), pages 1341-1355.
    8. Daniel Chai & Robert Faff & Philip Gharghori, 2013. "Liquidity in asset pricing: New Australian evidence using low-frequency data," Australian Journal of Management, Australian School of Business, vol. 38(2), pages 375-400, August.
    9. Kumari, Jyoti & Mahakud, Jitendra & Hiremath, Gourishankar S., 2017. "Determinants of idiosyncratic volatility: Evidence from the Indian stock market," Research in International Business and Finance, Elsevier, vol. 41(C), pages 172-184.
    10. Nguyen, Trang & Alpert, Karen & Faff, Robert, 2021. "Relative bond-stock liquidity and capital structure choices," Journal of Corporate Finance, Elsevier, vol. 69(C).
    11. Lischewski, Judith & Voronkova, Svitlana, 2012. "Size, value and liquidity. Do They Really Matter on an Emerging Stock Market?," Emerging Markets Review, Elsevier, vol. 13(1), pages 8-25.
    12. Hayette Gatfaoui, 2010. "Capital Asset Pricing Model," Post-Print hal-00589904, HAL.
    13. Malay K. Dey & Chaoyan Wang, 2008. "Return Spread and Liquidity on Chinese ADRs," NFI Working Papers 2008-WP-09, Indiana State University, Scott College of Business, Networks Financial Institute.
    14. Hadhri, Sinda & Ftiti, Zied, 2019. "Commonality in liquidity among Middle East and North Africa emerging stock markets: Does it really matter?," Economic Systems, Elsevier, vol. 43(3).
    15. Miralles Marcelo, José Luis & Miralles Quirós, María Del Mar & Oliveira, Célia, 2015. "Systematic liquidity: commonality and inter-temporal variation in the Portuguese stock market," Cuadernos de Gestión, Universidad del País Vasco - Instituto de Economía Aplicada a la Empresa (IEAE).
    16. Greg Filbeck & Xin Zhao & Ryan Knoll, 2017. "An analysis of working capital efficiency and shareholder return," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 265-288, January.
    17. French, Joseph J. & Taborda, Rodrigo, 2018. "Disentangling the relationship between liquidity and returns in Latin America," Global Finance Journal, Elsevier, vol. 36(C), pages 23-40.
    18. Ma, Yao & Yang, Baochen & Su, Yunpeng, 2020. "Technical trading index, return predictability and idiosyncratic volatility," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 879-900.
    19. Saumya Ranjan Dash & Jitendra Mahakud, 2013. "Investor Sentiment and Stock Return: Do Industries Matter?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 7(3), pages 315-349, August.
    20. Shweta Kundlia & Divya Verma, 2021. "Illiquidity Premium in the Indian Stock Market: An Empirical Study," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(6), pages 501-511, June.
    21. Mamatzakis, E & Babalos, Vassilios & filipas, n, 2013. "Fund Performance Evaluation in Greece Revisited: Evidence from the Impact of Operational Attributes," MPRA Paper 51640, University Library of Munich, Germany.

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