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Is there Value‐Added Information in Liquidity and Risk Premiums?

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  • Jacques Hamon
  • Bertrand Jacquillat

Abstract

Size has become a significant factor in explaining returns. According to the size effect, smaller capitalization stocks on average outperform larger capitalization stocks over long periods of time. This paper first documents the traditional size effect on the French market for the 1986–1998 period. It introduces a new proxy for size, free float, which is argued to be the appropriate measure of size and liquidity for most non‐US markets. Evidence is presented of a negative link between historical returns and free float. The link is significant even outside of the month of January, a notable divergence from results obtained on the NYSE. The rest of the paper is an attempt to take advantage of this ‘ex‐post’ phenomenon on an ‘ex‐ante’ basis, with an empirical study of the link between expected return, risk, and liquidity in a sample consisting of the main 150 stocks quoted on the Paris Bourse between January 1986 and January 1998. Liquidity premiums are estimated for portfolios from both a univariate and a multivariate perspective. The paper shows how risk and liquidity premiums can be used separately or in tandem for market timing and asset allocation. In all cases, the use of both premiums together leads to superior performance. Results confirm our measurements of liquidity and liquidity premiums and supply evidence that liquidity premiums together with risk premiums are useful in active asset management.

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  • Jacques Hamon & Bertrand Jacquillat, 1999. "Is there Value‐Added Information in Liquidity and Risk Premiums?," European Financial Management, European Financial Management Association, vol. 5(3), pages 369-394, November.
    • Handle: RePEc:bla:eufman:v:5:y:1999:i:3:p:369-394
    DOI: 10.1111/1468-036X.00100
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    Cited by:

    1. Fernandez, Pablo, 2004. "80 common and uncommon errors in company valuation," IESE Research Papers D/550, IESE Business School.
    2. Prat, Georges, 2013. "Equity risk premium and time horizon: What do the U.S. secular data say?," Economic Modelling, Elsevier, vol. 34(C), pages 76-88.
    3. Fernandez, Pablo, 2003. "75 common and uncommon errors in company valuation," IESE Research Papers Db/515, IESE Business School.
    4. Paul Cox & Stephen Brammer & Andrew Millington, 2007. "Pension Fund Manager Tournaments and Attitudes Towards Corporate Characteristics," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(7‐8), pages 1307-1326, September.
    5. Pablo Fernández & Andrada Bilan, 2013. "110 Common Errors in Company Valuations," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 33-78.
    6. Amir Amel†Zadeh, 2011. "The Return of the Size Anomaly: Evidence from the German Stock Market," European Financial Management, European Financial Management Association, vol. 17(1), pages 145-182, January.
    7. Pattaragit Netiniyom, 2016. "Does Free Float Affect Shareholder Wealth? New Evidence from the Stock Exchange of Thailand," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 8(2), pages 043-053, December.
    8. Tienyu Hwang & Simon Gao & Heather Owen, 2014. "Markowitz efficiency and size effect: evidence from the UK stock market," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 721-750, November.

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