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Liquidity and expected returns—Evidence from 1926–2008

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  • Baradarannia, M. Reza
  • Peat, Maurice

Abstract

This paper re-examines the liquidity effect on stock expected returns in the NYSE over the period 1926–2008, the pre-1963 period, for which there is a lack of research, and the post-1963 period. The results from the entire sample of 1926–2008 show that expected returns increase with the stock level illiquidity. However, illiquidity level has explanatory power in the cross-sectional variation of stock expected returns only over the post-1963 period, and is, both economically and statistically, insignificant for the whole sample and the pre-1963 period. These findings are robust after taking into account various characteristics such as size and risk controls. On the other hand, evidence from the entire sample and the pre-1963 sample suggests that the systematic liquidity risk plays a significant role in the cross-sectional variation of stock expected returns. The different result for the pre- and post-1963 is explained by the portfolio shifts occurred during the economic downturns.

Suggested Citation

  • Baradarannia, M. Reza & Peat, Maurice, 2013. "Liquidity and expected returns—Evidence from 1926–2008," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 10-23.
    • Handle: RePEc:eee:finana:v:29:y:2013:i:c:p:10-23
    DOI: 10.1016/j.irfa.2013.03.007
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    Cited by:

    1. Priyanka Naik & Y. V. Reddy, 2021. "Stock Market Liquidity: A Literature Review," SAGE Open, , vol. 11(1), pages 21582440209, January.

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    More about this item

    Keywords

    Liquidity; Asset pricing; Transaction costs; Effective spread;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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