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The diminishing liquidity premium

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  • Ben-Rephael, Azi
  • Kadan, Ohad
  • Wohl, Avi
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    Abstract

    Previous evidence suggests that less liquid stocks entail higher average returns. Using NYSE data, we present evidence that both the sensitivity of returns to liquidity and liquidity premia have significantly declined over the past four decades to levels that we cannot statistically distinguish from zero. Furthermore, the profitability of trading strategies based on buying illiquid stocks and selling illiquid stocks has declined over the past four decades, rendering such strategies virtually unprofitable. Our results are robust to several conventional liquidity measures related to volume. When using liquidity measure that is not related to volume, we find just weak evidence of a liquidity premium even in the early periods of our sample. The gradual introduction and proliferation of index funds and exchange traded funds is a possible explanation for these results. --

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    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/52.

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    Date of creation: 2008
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    Handle: RePEc:zbw:cfswop:200852

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    Keywords: Liquidity; Illiquidity; Liquidity Premium; Stock Returns;

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    References

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    Cited by:
    1. Geoff Willis, 2011. "Why Money Trickles Up - Wealth & Income Distributions," Papers 1105.2122, arXiv.org, revised May 2011.

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