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Liquidity risk and the beta premium

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.
1475-6803
Gong, Cynthia M.
53691994-4f04-447a-9499-c4738e183bf0
Luo, Di
cc1b0fa7-f630-45dc-ab05-495f9023148f
Zhao, Huainan
c1914fa7-b5f5-454a-9ef0-a44114ecfe8b
Gong, Cynthia M.
53691994-4f04-447a-9499-c4738e183bf0
Luo, Di
cc1b0fa7-f630-45dc-ab05-495f9023148f
Zhao, Huainan
c1914fa7-b5f5-454a-9ef0-a44114ecfe8b

Gong, Cynthia M., Luo, Di and Zhao, Huainan (2021) Liquidity risk and the beta premium. Journal of Financial Research. (doi:10.1111/jfir.12263).

Record type: Article

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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Accepted/In Press date: 21 July 2021
e-pub ahead of print date: 16 September 2021

Identifiers

Local EPrints ID: 450522
URI: http://eprints.soton.ac.uk/id/eprint/450522
DOI: doi:10.1111/jfir.12263
ISSN: 1475-6803
PURE UUID: 1a3c3f5a-00e2-493d-a0ef-57ddda22deda
ORCID for Di Luo: ORCID iD orcid.org/0000-0001-7405-6347

Catalogue record

Date deposited: 02 Aug 2021 16:32
Last modified: 28 Apr 2022 02:18

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Contributors

Author: Cynthia M. Gong
Author: Di Luo ORCID iD
Author: Huainan Zhao

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