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Do financial distress and liquidity crises affect value and size premiums?

Author

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  • Mohammed M. Elgammal
  • Tugba Bas
  • Orla Gough
  • Neeta Shah
  • Stefan van Dellen

Abstract

This study investigates the impact of liquidity crises on the relationship between stock (value and size) premiums and default risk in the US market. It first examines whether financial distress can explain value and size premiums, and then, subsequently, aims to determine whether liquidity crises increase the risk of value and size premium investment strategies. The study employs a time-varying approach and a sample of US stock returns for the period between January 1982 and March 2011, a period which includes the current liquidity crisis, so as to examine the relationship between default risk, liquidity crises and value and size premiums. The findings indicate that the default premium has explanatory power for value and size premiums, which affect firms with different characteristics. We also find that liquidity crises may actually increase the risks related to size and value premium strategies.

Suggested Citation

  • Mohammed M. Elgammal & Tugba Bas & Orla Gough & Neeta Shah & Stefan van Dellen, 2016. "Do financial distress and liquidity crises affect value and size premiums?," Applied Economics, Taylor & Francis Journals, vol. 48(39), pages 3734-3751, August.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:39:p:3734-3751
    DOI: 10.1080/00036846.2016.1145345
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    Cited by:

    1. Mohammad Sharik Essa & Evangelos Giouvris, 2023. "Fama–French–Carhart Factor-Based Premiums in the US REIT Market: A Risk Based Explanation, and the Impact of Financial Distress and Liquidity Crisis from 2001 to 2020," IJFS, MDPI, vol. 11(1), pages 1-39, January.
    2. Fahad Ali & RongRong He & YueXiang Jiang, 2018. "Size, Value and Business Cycle Variables. The Three-Factor Model and Future Economic Growth: Evidence from an Emerging Market," Economies, MDPI, vol. 6(1), pages 1-24, February.

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