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Liquidity risk and the beta premium

journal contribution
posted on 08.10.2021, 13:03 by Cynthia GongCynthia Gong, Di Luo, Huainan ZhaoHuainan Zhao
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.

Funding

National Natural Science Foundation of China. Grant Number: 71991473, 71671076

History

School

  • Business and Economics

Department

  • Economics

Published in

Journal of Financial Research

Publisher

Wiley

Version

AM (Accepted Manuscript)

Rights holder

© The Southern Finance Association and the Southwestern Finance Association

Publisher statement

This is the peer reviewed version of the following article: Gong, C., Luo, D. and Zhao, H., (2021). Liquidity Risk and the Beta Premium. Journal of Financial Research, doi: 10.1111/jfir.12263, which has been published in final form at https://doi.org/10.1111/jfir.12263. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited

Acceptance date

21/07/2021

Publication date

2021-10-04

ISSN

0270-2592

eISSN

1475-6803

Language

en

Depositor

Dr Cynthia Gong. Deposit date: 8 October 2021