The Value of True Liquidity

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This study uncovers the ability of liquid stocks to generate significant higher risk-adjusted
portfolio returns than their illiquid counterparts. Using U.S. stocks in
the period of 01/1990 to 09/2015, we show that a significant negative illiquidity
premium can be obtained when accounting for a high negative correlation between
a stocks’ illiquidity and its market value of equity. The risk-adjusted orthogonalized
illiquidity premium amounts to -0.576% per month and is robust to changes in the
portfolio formation setting.

Author(s):

Robin Borcherding    
University of Duisburg-Essen
Germany

Michael Stein    
University of Duisburg-Essen
Germany