 Liquidity biases in asset pricing testsElena Asparouhova, Hendrik Bessembinder and Ivalina Kalcheva Journal of Financial Economics, 2010, vol. 96, issue 2, 215-237 Abstract: Microstructure noise in security prices biases the results of empirical asset pricing specifications, particularly when security-level explanatory variables are cross-sectionally correlated with the amount of noise. We focus on tests of whether measures of illiquidity, which are likely to be correlated with the noise, are priced in the cross-section of stock returns, and show a significant upward bias in estimated return premiums for an array of illiquidity measures in Center for Research in Security Prices (CRSP) monthly return data. The upward bias is larger when illiquid securities are included in the sample, but persists even for NYSE/Amex stocks after decimalization. We introduce a methodological correction to eliminate the biases that simply involves weighted least squares (WLS) rather than ordinary least squares (OLS) estimation, and find evidence of smaller, but still significant, return premiums for illiquidity after implementing the correction. Keywords: Microstructure; noise; Illiquidity; Asset; pricing; Return; premium; Bias; correction (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:96:y:2010:i:2:p:215-237 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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