The Diminishing Liquidity Premium
- 1 April 2015
- journal article
- research article
- Published by Cambridge University Press (CUP) in Journal of Financial and Quantitative Analysis
- Vol. 50 (1-2), 197-229
- https://doi.org/10.1017/s0022109015000071
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.Keywords
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