Journal of Financial Economics Vol. 82 No. 3 2006
A liquidity-augmented capital asset pricing model
Abstract
Using a new measure of liquidity, this paper documents a significant liquidity premium robust to the CAPM and the Fama–French three-factor model and shows that liquidity is an important source of priced risk. A two-factor (market and liquidity) model well explains the cross-section of stock returns, describing the liquidity premium, subsuming documented anomalies associated with size, long-term contrarian investment, and fundamental (cashflow, earnings, and dividend) to price ratios. In particular, the two-factor model accounts for the book-to-market effect, which the Fama–French three-factor model fails to explain.
- DOI
- 10.1016/j.jfineco.2005.10.001
- Volume
- 82
- Issue
- 3
- Pages
- 631-671
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref