Illiquidity and stock returns: cross-section and time-series effects

This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return–illiquidity relationship. Also, stock returns are n...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial markets (Amsterdam, Netherlands) Netherlands), 2002, Vol.5 (1), p.31-56
Main Author: Amihud, Yakov
Format: Article
Language:English
Subjects:
Liquidity and asset pricing
Liquidity premium
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return–illiquidity relationship. Also, stock returns are negatively related over time to contemporaneous unexpected illiquidity. The illiquidity measure here is the average across stocks of the daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firm stocks, thus explaining time series variations in their premiums over time.
ISSN:1386-4181
1878-576X
DOI:10.1016/S1386-4181(01)00024-6