Liquidity risk and the beta premium
Liquidity risk and the beta premium
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.
Gong, Cynthia M.
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Luo, Di
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Zhao, Huainan
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Gong, Cynthia M.
0e22a6e6-53c4-47f5-ae26-a32931148b00
Luo, Di
cc1b0fa7-f630-45dc-ab05-495f9023148f
Zhao, Huainan
cfaa9f66-6ab2-428c-a4ee-628c8c747cb2
Gong, Cynthia M., Luo, Di and Zhao, Huainan
(2020)
Liquidity risk and the beta premium.
2020 FMA Virtual Conference.
19 - 23 Oct 2020.
(In Press)
Record type:
Conference or Workshop Item
(Paper)
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.
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More information
Accepted/In Press date: October 2020
Venue - Dates:
2020 FMA Virtual Conference, 2020-10-19 - 2020-10-23
Identifiers
Local EPrints ID: 444905
URI: http://eprints.soton.ac.uk/id/eprint/444905
PURE UUID: 321fb098-7b66-46bf-9ae1-a56ba8ae6520
Catalogue record
Date deposited: 11 Nov 2020 17:30
Last modified: 13 Dec 2021 03:21
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Contributors
Author:
Cynthia M. Gong
Author:
Di Luo
Author:
Huainan Zhao
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