Sources of liquidity premium: Risk or mispricing?

Pin Huang Chou; Kuan Cheng Ko; K. C.John Wei

doi:10.1142/9789811269943_0065

Sources of liquidity premium: Risk or mispricing?

Pin Huang Chou^*, Kuan Cheng Ko, K. C.John Wei

^*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceeding › Chapter › peer-review

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 characteristicbased 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.

Original language	English
Title of host publication	Handbook Of Investment Analysis, Portfolio Management, And Financial Derivatives (In 4 Volumes)
Publisher	World Scientific Publishing Co.
Pages	2051-2088
Number of pages	38
Volume	3-4
ISBN (Electronic)	9789811269943
ISBN (Print)	9789811269936
DOIs	https://doi.org/10.1142/9789811269943_0065
State	Published - 08 04 2024
Externally published	Yes

Bibliographical note

Publisher Copyright:
© 2024 World Scientific Publishing Company. All rights reserved.

Keywords

Characteristic-based model
Factor model
Liquidity
Mispricing
Risk

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10.1142/9789811269943_0065

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AU - Wei, K. C.John

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N2 - 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 characteristicbased 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.

AB - 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 characteristicbased 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.

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BT - Handbook Of Investment Analysis, Portfolio Management, And Financial Derivatives (In 4 Volumes)

PB - World Scientific Publishing Co.

ER -

Sources of liquidity premium: Risk or mispricing?

Abstract

Bibliographical note

Keywords

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