The Diminishing Liquidity Premium

Azi Ben-Rephael, Ohad Kadan and Avi Wohl

Journal of Financial and Quantitative Analysis, 2015, vol. 50, issue 1-2, 197-229

Abstract: Stock liquidity has improved over the recent 4 decades. This improvement was accompanied by a dramatic increase in trading activity. The net effect on the liquidity premium is ambiguous. We show that the characteristic liquidity premium of U.S. stocks has significantly declined over the past 4 decades. In recent years, characteristic liquidity is significantly priced only for the smallest common stocks. This decline stems from an improvement in liquidity and from a lower sensitivity of expected returns to liquidity. By contrast, systematic liquidity has not been trending down and is still significantly priced primarily among NASDAQ stocks.

Date: 2015
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