Liquidity risk and the beta premium

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

Published date: 16 September 2021

Additional Information: Funding Information: We thank Erik Devos (the Editor) and an anonymous referee for their insightful comments and suggestions. We are grateful to Joonki Noh (the discussant) and Daniel Huberand (the discussant) and conference participants at the Financial Management Association (FMA) 2020 meeting, British Accounting and Finance Association 2021 meeting, and French Finance Association (AFFI) 2021 international conference for their helpful comments and suggestions. We are grateful to the financial support from the National Natural Science Foundation of China (Grant No. 71991473 and No. 71671076). Publisher Copyright: © 2021 The Southern Finance Association and the Southwestern Finance Association