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Liquidity Premium

In: Investment Strategies

Author

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  • Bill Jiang

    (Legal & General Investment Management)

Abstract

The liquidity premium represents the additional rate of return expected by investors to compensate them for the risk of holding illiquid assets. The liquidity factor in equity investing captures excess returns delivered by stocks with low liquidity. This style factor has proven its ability to generate outperformance in the long term. This chapter starts with an introduction to asset liquidity. It suggests that investors should consider liquidity risk while pursuing the liquidity premium. A practical approach is to achieve a balanced portfolio allocation to the liquidity risk factor. The chapter presents four metrics to measure the market liquidity of stocks.

Suggested Citation

  • Bill Jiang, 2022. "Liquidity Premium," Springer Books, in: Investment Strategies, chapter 0, pages 185-191, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-82711-3_15
    DOI: 10.1007/978-3-030-82711-3_15
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