Liquidity and expected returns—Evidence from 1926–2008

M. Reza Baradarannia and Maurice Peat
Authors registered in the RePEc Author Service: Reza Bradrania

International Review of Financial Analysis, 2013, vol. 29, issue C, 10-23

Abstract: This paper re-examines the liquidity effect on stock expected returns in the NYSE over the period 1926–2008, the pre-1963 period, for which there is a lack of research, and the post-1963 period. The results from the entire sample of 1926–2008 show that expected returns increase with the stock level illiquidity. However, illiquidity level has explanatory power in the cross-sectional variation of stock expected returns only over the post-1963 period, and is, both economically and statistically, insignificant for the whole sample and the pre-1963 period. These findings are robust after taking into account various characteristics such as size and risk controls. On the other hand, evidence from the entire sample and the pre-1963 sample suggests that the systematic liquidity risk plays a significant role in the cross-sectional variation of stock expected returns. The different result for the pre- and post-1963 is explained by the portfolio shifts occurred during the economic downturns.

Keywords: Liquidity; Asset pricing; Transaction costs; Effective spread (search for similar items in EconPapers)
JEL-codes: G0 G1 G12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:29:y:2013:i:c:p:10-23

DOI: 10.1016/j.irfa.2013.03.007

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