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Journal Analysis - Is Liquidity Priced - Group 2
Journal Analysis - Is Liquidity Priced - Group 2
Journal Analysis - Is Liquidity Priced - Group 2
Geronimo Enguito
Mary Cor Sagrado
Michael Jay B. Homol
Title of the Scientific Paper
Is Liquidity Risk Priced? Theory and Evidence
Statement of the Paper’s Research Problem
The research aims to develop a new model that measures liquidity premium and then be
compared against identified liquidity premium from previous studies.
It is also concerned on finding out whether liquidity premium and cross-sectional stock
returns have significant relationship with each other.
Framework Used in the Paper
Theoretical: Sites concepts of previous related studies.
Identification of Assumption(s), if applicable
The liquidity factor based on LIQ is priced in the asset pricing test and captures the
liquidity risk.
The liquidity premium does not depend on the transactional characteristics of the market.
Investor can extend the investment horizon effectively by increasing the probability of
the investment position, maintaining a positive balance until it reaches the targeted return.
Conclusions
The research have found out that liquidity premium is highly comparable to the existing
measures in literature. Hence, the liquidity premium derived from the research is highly
considered as a close substitute to the conventional approach of liquidity measurement.
Furthermore, it was further concluded that there is a negative relationship between the liquidity
premium and cross-sectional stock returns and also a negative relationship between the risk
factor based on liquidity premium and the expected excess returns on portfolios sorted on the
liquidity premium in the time series. Therefore, it clearly manifest that the risk imbedded in the
developed liquidity premium measure is priced in stock and portfolio returns and directly
substantiate the claims of previous studies.