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The diminishing liquidity premium

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

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.

Suggested Citation

  • Ben-Rephael, Azi & Kadan, Ohad & Wohl, Avi, 2008. "The diminishing liquidity premium," CFS Working Paper Series 2008/52, Center for Financial Studies (CFS).
  • Handle: RePEc:zbw:cfswop:200852
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    References listed on IDEAS

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    1. Willis, Geoff, 2011. "Why money trickles up – wealth & income distributions," MPRA Paper 30851, University Library of Munich, Germany.
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    More about this item

    Keywords

    Liquidity; Illiquidity; Liquidity Premium; Stock Returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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