Liquidity Risk and the Beta Premium

Cynthia Gong, Di Luo (Lead / Corresponding author), Huainan Zhao

    Research output: Contribution to journalArticlepeer-review

    2 Citations (Scopus)
    2 Downloads (Pure)

    Abstract

    As opposed to the “low beta low risk” convention, we show that low beta stocks are illiquid and exposed to high liquidity risk. After adjusting for liquidity risk, low beta stocks no longer outperform high beta stocks. Although investors who “bet against beta” earn a significant beta premium under the Fama–French three- or five-factor models, this strategy fails to generate any significant returns when liquidity risk is accounted for. Our work helps understand the beta premium from a new liquidity-risk perspective, and draws useful implications for both fund and corporate managers.
    Original languageEnglish
    Pages (from-to)789 - 814
    Number of pages26
    JournalJournal of Financial Research
    Volume44
    Issue number4
    Early online date16 Sept 2021
    DOIs
    Publication statusPublished - 17 Jan 2022

    Keywords

    • Liquidity risk
    • Beta premium
    • Cross-sectional stock returns

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