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Sources of Liquidity Premium: Risk or Mispricing?

In: Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes

Author

Listed:
  • Pin-Huang Chou
  • Kuan-Cheng Ko
  • K.C. John Wei

Abstract

We study three widely used liquidity measures and find that they all carry significant premiums beyond the size, book-to-market, and momentum effects. Although liquidity as a risk factor bears a significant return premium, it is better characterized by a characteristic-based model. Further analysis shows that (1) although the premium persists for up to five years following formation, it diminishes over time and becomes insignificant in the post-1960 period; (2) the premium is larger for stocks with higher idiosyncratic risk. Thus, the empirical results provide some evidence that supports the mispricing argument.

Suggested Citation

  • Pin-Huang Chou & Kuan-Cheng Ko & K.C. John Wei, 2024. "Sources of Liquidity Premium: Risk or Mispricing?," World Scientific Book Chapters, in: Cheng Few Lee & Alice C Lee & John C Lee (ed.), Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes, chapter 65, pages 2051-2088, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811269943_0065
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    Keywords

    Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G1 - Financial Economics - - General Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • G3 - Financial Economics - - Corporate Finance and Governance

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