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The Diminishing Liquidity Premium

Published online by Cambridge University Press:  08 June 2015

Azi Ben-Rephael ,
Ohad Kadan  and
Avi Wohl
Azi Ben-Rephael
Affiliation:
abenreph@indiana.edu, Indiana University, Kelley School of Business, Bloomington, IN 47405
Ohad Kadan
Affiliation:
kadan@wustl.edu, Washington University in St. Louis, Olin Business School, St. Louis, MO 63130
Avi Wohl*
Affiliation:
aviwohl@post.tau.ac.il, Tel Aviv University, Recanati Graduate School of Business Administration, Tel Aviv 69978, Israel.
*
*Corresponding author: aviwohl@post.tau.ac.il
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 1-2 , April 2015 , pp. 197 - 229
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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