Information uncertainty and the pricing of liquidity

Kang, Wenjin, Li, Nan, and Zhang, Huiping (2019) Information uncertainty and the pricing of liquidity. Journal of Empirical Finance, 54. pp. 77-96.

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Abstract

This study shows that, to obtain a precise measure of the liquidity premium in the stock market, it is important to recognize the influence of information uncertainty on the pricing of liquidity. Information uncertainty, which is positively correlated with stock illiquidity but negatively priced in the stock market, obscures the estimation of the liquidity premium. After controlling for its influence, we find that the liquidity premium is statistically significant and economically important in the U.S. stock market. Moreover, the risk-adjusted liquidity premium remains significant in both the earlier and more recent sub-sample periods. Our study addresses the recent debate about whether liquidity is still priced in recent decades, given the significant improvement in the trading technology and increase of the trading volume during this period.

Item ID: 59940
Item Type: Article (Research - C1)
ISSN: 0927-5398
Keywords: Liquidity, Information Uncertainty, Stock Return
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Funders: Shanghai Jiao Tong University, Shanghai University of Finance and Economics
Date Deposited: 04 Sep 2019 02:12
FoR Codes: 15 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 1502 Banking, Finance and Investment > 150201 Finance @ 100%
SEO Codes: 90 COMMERCIAL SERVICES AND TOURISM > 9001 Financial Services > 900101 Finance Services @ 100%
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