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The Diminishing Liquidity Premium

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  • Ben-Rephael, Azi
  • Kadan, Ohad
  • Wohl, Avi

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.

Suggested Citation

  • Ben-Rephael, Azi & Kadan, Ohad & Wohl, Avi, 2015. "The Diminishing Liquidity Premium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(1-2), pages 197-229, April.
    • Handle: RePEc:cup:jfinqa:v:50:y:2015:i:1-2:p:197-229_00
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