Reassessing the Illiquidity-Return Relationship: Evidence from Germany, the UK, and the U.S

Thomas Paul, Abdullah Aryoubi and Thomas Walther

International Review of Financial Analysis, 2025, vol. 106, issue C

Abstract: We investigate the relationship between market illiquidity and excess returns in the stock markets of Germany, the UK, and the U.S. from 1999 to 2022. Despite the growing criticism of this relationship, we show that illiquidity still is a significant factor, especially when we distinguish between stable and crisis periods. Unexpected illiquidity is negatively related to returns in all periods, while the effect of expected illiquidity differs over time. Our results are robust to various variations of Amihud's illiquidity measure.

Keywords: Illiquidity; Excess return; Structural breaks; Financial turmoil; Asset pricing; Portfolio management (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:106:y:2025:i:c:s1057521925005563

DOI: 10.1016/j.irfa.2025.104469

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