Received: 25 November 2019 Revised: 27 June 2020 Accepted: 28 June 2020

DOI: 10.1002/ijfe.2136

RESEARCH ARTICLE

Liquidity, time-varying betas and anomalies: Is the high

trading activity enhancing the validity of the CAPM in the
UK equity market?

Javier Rojo-Suárez | Ana Belén Alonso-Conde | Ricardo Ferrero-Pozo

Department of Business Administration,

Rey Juan Carlos University, Madrid, Spain
Correspondence
Javier Rojo-Suárez, Rey Juan Carlos
University, Department of Business
Administration Paseo de los Artilleros s/n,
28032 Madrid, Spain.
Email: javier.rojo@urjc.es
Funding information
Comunidad de Madrid, Consejería de
Educación e Investigación PEJ16/SOC/AI-
1627 PEJD-2018-PRE/SOC-8898
Abstract
In the last decades, a large number of multifactor assetpricing models have
emerged with the aim of correcting the estimated equity risk premiums for
some well-documented market anomalies. In any case, recent research on
asset pricing shows how the higher liquidity resulting from the globalization of
financial markets has significantly reduced returns tied to many strategies
based on market anomalies. In this framework, questions arise about the possi-
ble renovated validity of classic assetpricing models. On this basis, in this
paper we study to what extent the capital assetpricing model (CAPM) has
recovered its past explanatory power. Specifically, we propose a time-varying
beta CAPM in order to control for the variable nature of beta risk to changes
in the market liquidity, using the variation of the Amihud illiquidity measure
to account for the degree of trading activity. We test both the time-varying and
constant beta models on different sets of anomaly portfolios for the UK equity
market, and we compare their performance to that of the Fama–French three-
and five-factor models. Additionally, we test the constant beta model on a set
of actively managed portfolios, formed according to the variation in market
illiquidity in the previous year. Our results show that the pricing errors of the
CAPM have significantly decreased with respect to those of previous literature.
Furthermore, the time-varying beta model performs similarly to the Fama–
French models in most cases. These results are consistent with increased trad-
ing activity that reduces arbitrage opportunities and, therefore, enhances mar-
ket efficiency.

KEYWORDS
Amihud illiquidity measure, CAPM, Fama–French model, market anomalies, market efficiency,
time-varying beta

1 | INTRODUCTION of financial tasks, their empirical success has been tradi-

Although the classic assetpricing models, with the
capital asset pricing model (CAPM) (Sharpe, 1964;
Lintner, 1965) as its main exponent, enjoy high recogni-
tion and are extensively used in practice for a wide range
tionally small. Together with the difficulty of measuring
such a volatile variable as the market return (Black,
Jensen, & Scholes, 1972; Fama & MacBeth, 1973; Miller &
Scholes, 1972), findings on a variety of well-documented
market anomalies reveal severe weaknesses in the

Int J Fin Econ. 2020;1–16. wileyonlinelibrary.com/journal/ijfe © 2020 John Wiley & Sons Ltd 1
2 ROJO-SUÁREZ ET AL.
CAPM. These anomalies not only lead to an increase in
the gap between betas and expected returns, but in many
cases they also result in inverse patterns between both
variables. Remarkably, Cochrane (2011) shows that the
CAPM works correctly prior 1963, properly capturing the
value effect (see Figure A1 of his paper), that is, produc-
ing higher betas for value portfolios and lower betas for
growth portfolios. Conversely, for the period 1963–2009,
the author shows that exactly the opposite is true. Since
the pattern of expected returns persists (i.e., value stocks
still provide the highest expected returns, and vice versa),
this completely ruins the performance of the CAPM.
In any case, recent research on asset pricing shows
how the high liquidity resulting from the globalization of
financial markets has significantly reduced returns tied
to many strategies based on market anomalies. Conse-
quently, questions arise about a hypothetical renovated
validity of classic assetpricing models, and more specifi-
cally the CAPM. Accordingly, in this paper we study to
what extent the CAPM has recovered its past explanatory
power in one of the largest equity markets in the world
according to the World Federation of Exchanges, the
London Stock Exchange. Besides the classic constant beta
model (hereafter referred to as classic CAPM), we pro-
pose a time-varying beta CAPM (hereafter referred to as
scaled CAPM) that allows us to control for the variable
nature of beta risk to changes in market illiquidity. We
use the Amihud illiquidity measure to account for the
degree of trading activity (Amihud, 2002). However,
unlike the majority of the literature, in order to avoid
problems arising from the non-stationarity of this indica-
tor in sample, we use variations instead of levels. As
shown below, our results reveal that, using market data
for the period from January 1989 to December 2018, the
pricing errors of the classic CAPM have significantly
decreased with respect to those of previous literature.
Moreover, the scaled CAPM performs similarly to the
Fama–French models in most cases.
While the first studies on market anomalies focus on
several relations not captured by the CAPM, such as
those of expected returns with the size of the firm
(Banz, 1981), the book-to-market equity (Basu, 1983), the
price-to-earnings ratio (Rosenberg, Reid, & trage pricing theory (hereafter, APT). The ICAPM
Lanstein, 1985), the past short-term returns (Jegadeesh &
Titman, 1993) or the past sales growth (Lakonishok,
Shleifer, & Vishny, 1994), currently many other variables
constitute anomalies in the framework of classic
assetpricing models. Such is the case of accruals
(Sloan, 1996), idiosyncratic volatility (Ang, Hodrick,
Xing, & Zhang, 2006), asset growth (Cooper, Gulen, &
Schill, 2008), net stock issuance (Fama & French, 2008),
return-on-book equity (Chen, Novy-Marx, & the other hand, the APT (Ross, 1976) adopts a different
Zhang, 2011) or gross profitability (Novy-Marx, 2013).
For the specific case of the United Kingdom equity mar-
ket, interestingly, Cuthbertson, Hayes, and Nit-
zsche (1997) clearly reject efficiency for the period from
1918 to 1993. However, the authors show that the CAPM
provides results that are close to efficiency, despite the
fact that tests for short-termism provide evidence to the
contrary. Additionally, recent research expands the scope
of analysis, covering topics such as the relation between
market anomalies and the real economy, while increas-
ing the focus on the persistence of alphas rather than
their magnitude (Van Binsbergen & Opp, 2019).
Despite the above, research on stock return predict-
ability has contributed to largely explain the failure of
classic assetpricing models. According to Roll's theorem
(Roll, 1977), any portfolio on the mean–variance frontier
contains exactly the same information about asset prices
as the wealth portfolio –commonly proxied by a broad-
based portfolio such as the value-weighted London Stock
Exchange portfolio. Therefore, the whole issue consists in
finding an efficient portfolio, which, together with the
risk-free rate, allows investors to price every asset. If mar-
ket returns are independent and identically distributed
(i.i.d.), this will be achieved simply by compiling enough
historical data to ensure that estimates are statistically
significant. However, since return predictability and
time-varying expected returns are interchangeable terms,
the forecastable nature of stock returns completely ruins
the CAPM results out-of-sample, even when the model
perfectly fits in-sample. Given the large number of vari-
ables useful for forecasting stock returns,1 the poor
results of the CAPM arise mainly from the variable
nature of the expected returns, rather than arising from
other problems such as the difficulties in correctly deter-
mining the wealth portfolio. Table 1 summarizes the
results achieved by some recent tests on the CAPM,
which typically introduce some variation to the classic
model, or conceive the proof as a way to highlight the
strengths of some alternative assetpricing model.
The majority of the literature deals with this problem
by using multifactor assetpricing models, which can be
viewed as closed-form solutions for more general models
such as the intertemporal CAPM (ICAPM) or the arbi-
(Merton, 1973) assumes that investors face shifts in the
investment opportunity set which can be captured by dif-
ferent state variables. This approach automatically gives
rise to a multifactor assetpricing model, with the state
variables as right-hand side variables. Since shifts in the
environment determine changes in the conditional distri-
bution of asset returns over time, the state variables must
have some predictive power (Cochrane, 2005, p. 172). On
perspective, assuming that stocks share strong common
ROJO-SUÁREZ ET AL. 3

TABLE 1 Recent evidence on the CAPM performance

Passes model
Reference Country Test assets Sample Model R 2 statistic evaluation test
Campbell, Giglio, Polk, US 25 portfolios BE/ME, 6 risk- 1931–1963 Classic CAPM 74% No (J-test)
and Turley (2018) sorted portfolios, 18 1963–2011 Classic CAPM −20% No (J-test)
characteristic- and risk-
sorted portfolios and
managed versions of these
portfolios
Hyde and Sherif (2010) UK 9 industry portfolios and 6 1975–2005 Conditional Multiple No (J-test)
size-BE/ME portfolios CAPM values, poor
results
Jagannathan and US 100 size-beta portfolios 1963–1990 Classic CAPM 1.35% No (HJ-distance)
Wang (1996) Conditional 29.32% No (HJ-distance)
CAPM
Conditional 55.21% Yes (HJ-distance)
CAPM with
human capital
Jagannathan and US 25 size-BE/ME portfolios 1954–2003 Classic CAPM 0% No (HJ-distance)
Wang (2007)
Lettau and US 25 size-BE/ME portfolios 1963–1998 Classic CAPM 1% No (χ 2 test)
Ludvigson (2001) Conditional 31% Yes (χ 2 test)
CAPM
Conditional 77% Yes (χ 2 test)
CAPM with
human capital
Lustig and Van US 25 size-BE/ME portfolios and 1926–2002 Classic CAPM 28.3% Not reported
Nieuwerburgh (2005) the value-weighted market Collateral- 87.8% Not reported
return CAPM
Maio and Santa- US 25 size-BE/ME portfolios 1963–2008 Classic CAPM −0.42% Not reported
Clara (2012) 25 size-momentum portfolios 1963–2008 Classic CAPM −0.09% Not reported
Yogo (2006) US 25 size-BE/ME portfolios 1951–2001 Classic CAPM −62% No (J-test)

Note: Conditional versions of the model use different variables as instruments. Hyde and Sherif (2010) use the lagged excess market return,
the yield on a console bond less the return on a 30-day bill, the term premium calculated as the return for holding a 90-day bill for 1 month
in excess of the return on a 30-day bill, and the dividend yield spread. Jagannathan and Wang (1996) use the yield spread between BAA- and
AAA-rated bonds. Lettau and Ludvigson (2001) use the consumption-wealth ratio (cay). Lustig and Van Nieuwerburgh (2005) use the ratio
of housing wealth to human wealth (my). R2 statistics are not adjusted for degrees of freedom.

components –factors– and idiosyncratic movements do
not carry information about prices. Specifically, the APT
assumes that the errors provided by the regression of
asset payoffs (i.e., returns, excess returns, etc.) on factors
are uncorrelated across assets. Therefore, the APT consti-
tutes essentially a statistical characterization of asset pay-
offs, which does not require the strict economic
assumptions tied to the ICAPM. However, in reality asset
payoffs do not follow a perfect factor structure, so the law
of one price, by itself, can provide arbitrarily wrong
results (Cochrane, 2005, p. 177). In general, this forces
the model to embed some economic restrictions, typically
in the form of bounds on the Sharpe ratios of factor port-
folios and asset payoffs.
Although in practice it is often difficult to sort multi-
factor models into one of these two categories, some of
the most prominent assetpricing models are good exam-
ples of both ICAPM and APT approaches. This is the case
of the Fama–French three-factor model (Fama &
French, 1993), which adds two extra factors to the classic
CAPM –the small minus big market value factor (SMB)
and the high minus low book-to-market ratio factor
(HML)– and still remains one of the most successful
assetpricing models in the literature. Carhart (1997)
4 ROJO-SUÁREZ ET AL.
studies the persistence of returns in the U.S. mutual fund
market, developing a performance attribution model that
adds a momentum factor to the Fama–French three-
factor model. He achieves results consistent with market
efficiency on the basis of his four-factor model. On the
other hand, Fama and French (2015) improve their
three-factor model by adding two extra factors, namely,
RMW (the excess return of the most profitable stocks
minus the least profitable) and CMA (the excess return of
firms that invest conservatively minus aggressively).
Notwithstanding the above, recent research shows how
the high global trading activity and the increase in the liquid-
ity are reducing the spreads tied to many strategies based on
market anomalies. While some authors study the effects of the
increased trading activity on specific market anomalies
(Green, Hand, & Soliman, 2011; Mashruwala, Rajgopal, &
Shevlin, 2006) and concrete variables, such as the trading costs
of institutional investors (Chakravarty, Panchapagesan, &
Wood, 2005; French, 2008), others focus on the effects on the
liquidity (Hendershott, Jones, & Menkveld, 2011). Notewor-
thy, Chordia, Roll, and Subrahmanyam (2011) conclude that,
in recent years, stock market intra-day volatility and cross-
sectional predictability of returns has decreased, while
information-based trading activity has intensified, resulting in
a higher market efficiency. Consistently, Chordia, Sub-
rahmanyam, and Tong (2014) show how the greater trading
activity has significantly downsized the majority of the market
anomalies. Specifically, their results reveal that average
returns provided by strategies based on market anomalies
have approximately halved in recent years due to increases in
hedge funds activity, short interest and aggregate share turn-
over. Accordingly, McLean and Pontiff (2016) show that port-
folio returns tied to 97 variables useful for forecasting cross-
sectional stock returns are 58% lower post-publication. The
authors emphasize that post-publication declines are stronger
for variables with higher in-sample returns. On the other
hand, returns are higher for portfolios with high idiosyncratic
risk and low liquidity. Bornholt (2013) states that, if the mar-
ket anomalies are not permanent, then the CAPM may be
revived again. He explains how the beta anomaly –the fact
that the CAPM tends to underestimate the returns of the port-
folios formed by stocks with low betas, and vice versa– has
weakened and it is reasonable to believe that it will disappear
over time.
In this paper, we use both the Fama–French three-
and five-factor models (hereafter referred to as FF3 and
FF5 models, respectively) to check the performance of
the scaled CAPM and the robustness of its results, consis-
tently with common practice in the assetpricing litera-
ture. We test all models on four different sets of
portfolios, namely, 25 portfolios sorted by size and book-
to-market equity (BE/ME), 20 portfolios sorted by the
growth of total assets in the previous fiscal year,
62 industry portfolios, and the total sample of 107 portfo-
lios that results from aggregating the previous samples.
Parallel to this, we test the performance of the classic
CAPM on a set of actively managed portfolios, formed on
the basis of the portfolios defined above and the Amihud
illiquidity measure of the market as a whole, for the pre-
vious year. This allows us to check how the CAPM per-
forms in pricing different trading strategies mechanically
driven by the variation in market illiquidity.
Hereafter, the paper proceeds as follows: Section 2
defines the model under analysis, Section 3 discusses the
results, and Section 4 concludes the paper.
2 | THE M ODEL
Given a market that satisfies the law of one price, there is
one single stochastic discount factor (SDF) in the payoff
space which exactly prices all payoffs (Harrison &
Kreps, 1979; Ross, 1978; Rubinstein, 2010). Consequently:
pt = Et ðmt + 1 xt + 1 Þ, ð1Þ
where pt is a N-dimensional vector of prices, mt+1 is the
SDF, xt+1 is the N-dimensional vector of future payoffs,
and Et() is the expectation conditional on information at
time t. Since asset returns are payoffs with price one, we
can rewrite expression (1) as follows:
1 = Et ðmt + 1 Rt + 1 Þ, ð2Þ
where Rt+1 is a N-dimensional vector of returns at time t
+ 1. Given that the difference between two returns is an
excess return, that is, a payoff with price zero, then:


0 = Et mt + 1 Ret+ 1 , ð3Þ
where Ret+ 1 is a N-dimensional vector of excess returns.
Rearranging expression (3) to express expected excess
returns as a function of the SDF:



 cov t mt + 1 , Ret+ 1
Et Ret+ 1 =− , ð4Þ
E t ð mt + 1 Þ
Expression (4) can be easily written in terms of a beta
model, simply by multiplying and dividing by vart(mt+1):

 

 cov t mt + 1 , Ret+ 1 vart ðmt + 1 Þ
Et Ret+ 1 = −
vart ðmt + 1 Þ E t ð mt + 1 Þ ð5Þ


= βt mt + 1 ,Rt + 1 λt ðmt + 1 Þ,
e
ROJO-SUÁREZ ET AL.
Assuming a SDF linear in a K-dimensional vector of
factors, mt + 1 = at + b0t f t + 1 , expression (5) gives rise to a
factor assetpricing model:



Et Ret+ 1 = βt f t + 1 , Ret+ 1 λt ðf t + 1 Þ,
where f
t+1 is the vector
 of factors, at and bt are parame-
ters, βt f t + 1 ,Ret+ 1 is the matrix of order N × K of betas
of excess returns on factors, and λt(ft+1) is the K-
dimensional vector of prices of the factors. Logically, the
equivalence of expressions (5) and (6) is guaranteed pro-
vided that the parameters of the model are determined
consistently. Specifically, if we demean the factors of the
model for reasons of clarity, then at = Et(mt+1) and the
parameters bt and λt(ft+1) must satisfy (Lettau &
Ludvigson, 2001):

−1
bt = −at cov t f t + 1 , f 0t + 1 λt ðf t + 1 Þ,
According to the law of one price, expressions above
hold regardless of the economic content of the model and,
particularly, expression (6) holds regardless of the
approach used to explain the price formation process,
either the ICAPM or the APT. However, if we additionally
assume that the pricing function leaves no arbitrage
opportunities, then at least one positive SDF is
guaranteed2 (Ross, 1978). Since marginal utility is assumed
to be positive, this allows for a purely macroeconomic
explanation of the price formation process. In this frame-
work, the first-order condition for an optimal consumption
and portfolio choice allows us to express the SDF as a
function of the investor's marginal utility, as follows:
u0 ðct + 1 Þ
mt + 1 = β , ð8Þ
u 0 ðc t Þ
where β is the subjective discount factor,3 u0 (ct) is the
marginal utility, and ct is the consumption at time t in
real units. If the investor's utility function is separable,
then u(ct, xt) = υ(ct) + ω(xt), and consumption is the only
relevant variable for asset pricing. In that case, without
assuming any specific property for asset returns, the
ICAPM arises naturally. Specifically, if optimal consump-
tion is a function of a vector of state variables zt, ct = g
(zt), then expression (6) holds automatically, with:

0
f t + 1 = RW
t + 1 , zt + 1 ,
where RW t + 1 is the rate of return on a claim to total
wealth, or wealth portfolio. It is worth to note that, with
5
log utility, the consumption is proportional to wealth, so
f t + 1 = RW 4
t + 1 and expression (6) becomes the CAPM :



W 
Et Ret+ 1 = βt RW
t + 1 ,R t + 1 λt Rt + 1 ,
e
ð10Þ
ð6Þ
In any case, it should be noted that all expressions
above involve time-varying parameters. While classic
empirical testing of assetpricing models typically assumes
parameters that are constant over time, shifts in market
structure and the forecastable nature of returns call into
question this approach. Consequently, as previously
noted, in this paper we propose a model that controls for
the variable nature of the parameters of expression (10),
in the presence of changes in the trading activity of the
market. Specifically, we assume a linear SDF with time-
varying parameters that depend on shifts in the illiquidity
level in the previous period. Using an approach equiva-
ð7Þ lent to that of Lettau and Ludvigson (2001), we define the
SDF of our model as follows:
t + 1 = θ0 + θ1 ΔILt + ðψ 0 + ψ 1 ΔILt ÞRt + 1 ,
mt + 1 = at + bt RW
W
ð11Þ
where θ0, θ1, ψ 0 and ψ 1 are parameters, and ΔILt is the
variation in the market illiquidity from the period ending
in t − 1 to the period ending in t. The use of an illiquidity
instrument allows us to drop the t subscripts in at and bt,
under the assumption that their variability over time
arises from changes in the market illiquidity. This allows
us to write expression (3) as follows:
 
0 = E ½θ0 + θ1 ΔILt + ðψ 0 + ψ 1 ΔILt ÞRW e
t + 1 Rt + 1 , ð12Þ
Rearranging terms, we get the following
scaled CAPM:





E Rte+ 1
= β RtW+ 1 , Rte+ 1 λ
RtW+ 1 + β ΔILt ,Rte+ 1 λðΔILt Þ
+ β RtW+ 1 ΔILt , Rte+ 1 λ RtW+ 1 ΔILt ,
ð13Þ
It is worth noting that the last term on the right-hand
side of expression (13) helps us to capture the time-
varying pattern of the parameters in expression (10),
which allows us to express the unconditional mean
ð9Þ returns in terms of an unconditional multifactor model.
As mentioned above, we use the Amihud illiquid-
ity measure to estimate the illiquidity level of the
market, according to the following expression
(Amihud, 2002):
6 ROJO-SUÁREZ ET AL.
jRi,d j
ILi,d = , ð14Þ
VOLi,d
where jRi,dj is the absolute return of asset i on day d and
VOLi,d is the volume traded for asset i on day d in cur-
rency units. Although Amihud (2002) remarks that there
are several aspects that determine the liquidity of
stocks—market value, turnover, or the bid-ask spread,
among many others—and it is doubtful that there is a
single measure that captures them all, the Amihud illi-
quidity measure is widely used by the literature to proxy
the market illiquidity.
In order to aggregate ILi,d over time, we operate sepa-
rately in the numerator and denominator of expression
(14), as follows:
Q
t function as follows:
jRi,d j
ILi,t = Pdt = 1 , ð15Þ
d = 1 VOLi,d
Additionally, to estimate the illiquidity of the market
as a whole, we calculate the weighted average of ILi,t
across assets, as:
X Et Ret+ 1
N
ILi,t MEi,t
ILt = , ð16Þ
i=1
ME t
where MEi,t is the market equity of asset i at time t, and
MEt is the total market equity at time t. Finally, regard-
less of the long-run behaviour of ILt, in order to avoid
problems arising from its non-stationarity in sample, we
use the variation of ILt in our model.
All beta models described above set a restriction on the
intercepts of the time-series regressions that allow calculating
beta estimates. Given the following time-series regression:
Reit = αi + β0i f t + εit , ð17Þ
where Reit is the excess return for the asset i at time t, αi is
the intercept, and εit is the error term, then the intercepts
must satisfy (Cochrane, 2005, p. 244):
αi = β0i ½λ− Eðf t Þ, ð18Þ
If the assetpricing model prices assets perfectly and
the factors are excess returns, then λ = E(ft) and the
intercepts are zero. As previously noted, the fact that the
returns provided by many anomaly-based strategies have
declined significantly in recent years, should imply lower
returns for the following arbitrage portfolios:
Reit −β0i f t = αi + εit , ð19Þ
and, consequently, lower intercepts, thereby improving
the performance of the assetpricing model.
Finally, following an approach similar to that of
Campbell et al. (2018), we also consider managed portfo-
lios that change equity exposure according to the value of
some variable, in this case ΔILt. At this point, it is worth
to note that instrumental variables, such as the market
illiquidity, may affect indistinctly on both sides of the
pricing function. Specifically, given an instrument zt—or
a vector of instruments—observable at time t, which is
informative about the state of the economy or predicts
returns, then, following the methodology developed by
Hansen and Singleton (1982), we can write the pricing


0 = Et mt + 1 Ret+ 1 zt , ð20Þ
which automatically provides the following model of
covariances:



 cov t mt + 1 zt , Ret+ 1
=− , ð21Þ
E t ð mt + 1 z t Þ
However, expression (20) can also be written as
follows:



 cov t mt + 1 , Ret+ 1 zt
Et Ret+ 1 zt =− ð22Þ
E t ðm t + 1 Þ
Therefore, expressions (21) and (22) constitute two
different ways of testing the economic content of the
model. However, since pricing errors that arise from
these expressions are sensitive to model misspecification,
both approaches complement each other. For this reason,
in the following Section we test the assetpricing model in
both ways.
3 | RESULTS A ND DISCUSSION
We test the model defined in the previous Section on dif-
ferent sets of portfolios, which comprise all stocks listed
in the London Stock Exchange for the period from
January 1989 to December 2018. We compile all stock
data from Thomson Reuters Datastream database. Partic-
ularly, we collect data for the following series, on a
monthly basis: (a) total return index (RI series), which
ROJO-SUÁREZ ET AL.
allows us to determine asset returns, (b) market value
(MV series), (c) market-to-book equity (PTBV series),
(d) total assets (WC02999 series), (e) return on equity
(WC08301 series), (f) tax rate (WC08346 series),
(g) primary SIC codes, (h) turnover by volume
(VO series), and (i) the market price (P series). Addition-
ally, we compile RI, VOL and P series on a daily basis in
order to determine the Amihud illiquidity measure. Fol-
lowing Griffin, Kelly, and Nardari (2010), we use the
generic rules provided by the authors for excluding non-
common equity securities from Datastream data. Specifi-
cally, we remove from our sample all stocks issued by
real estate investment trusts, venture capital trusts, cur-
rency funds and exchange traded funds. Table B.1 in Grif-
fin et al. (2010) lists the Datastream industry codes that
correspond to these securities.
We use the three-month interest rate of the Treasury
Bill for the United Kingdom, as provided by the OECD
database, as a proxy for the risk-free rate.
We use this data to create four sets of portfolios, which
constitute our test assets.5 First, we create 25 size-BE/ME
portfolios, according to the Fama and French (1993) meth-
odology. Specifically, at the end of June of each year we
allocate all stocks to quintiles based on their market equity
and, analogously, we allocate stocks in an independent
sort to five BE/ME groups. Size-BE/ME portfolios are
determined as the intersection of the size and BE/ME
groups. We determine value-weighted returns on the port-
folios accordingly. Second, we form 20 anomaly portfolios
using the same approach, this time with total asset growth
as sorting variable. Third, we form all possible industry
portfolios according to data available, using two-digit SIC
codes. As a result, the total number of industry portfolios
amounts to 62. Finally, the fourth dataset comprises all
portfolios of the previous samples. It is worth to mention
that, although value portfolios have traditionally been a
challenging hurdle for the CAPM, Lewellen, Nagel, and
Shanken (2010) explain that the strong factor structure of
these portfolios can easily lead to overstating the explana-
tory power of assetpricing models. To avoid this, the
authors suggest using additional portfolios, for example
industry portfolios. Additionally, they suggest testing
models in samples that simultaneously combine portfolios
formed under different sorting variables. We have followed
these recommendations to configure our datasets.
We use FF3 and FF5 models to compare their results
with those provided by the scaled CAPM. Consequently,
we use our data series to determine the required factors,
following the Fama and French (1993) and Fama and
French (2015) methodology. As usual in the assetpricing
literature, we use the value-weighted market portfolio
minus the risk-free rate (hereafter, RMRF) as a proxy for
the wealth portfolio RW t + 1.
7
Given the strong seasonal behaviour of the liquidity
premium (Batrinca, Hesse, & Treleaven, 2018;
Eleswarapu & Reinganum, 1993), we adapt the approach
followed by Jagannathan and Wang (2007) and switch
our final series to an annual basis.
Table 2 shows the main summary statistics for portfo-
lios and factors, while Table 3 shows the correlations
between our test assets and the explanatory variables of
the scaled CAPM, that is, RMRF and ΔIL. As shown,
both asset growth portfolios and industry portfolios pro-
vide moderate mean returns and standard deviations in
most cases. However, size portfolios exhibit mean returns
and volatilities abnormally high for the first and second
quintiles, mainly due to several specific firms that experi-
enced important price increases in concrete periods. In
any case, the size and value effects work as expected, so
that, in general, the smaller the size and the higher the
BE/ME ratio, the higher the mean return, and vice versa.
With regard to factors, it is worth noting that the mean
return of RMRF amounts to 12.46%, which is a relatively
high value compared to other stock markets. In fact, the
Sharpe ratio of RMRF amounts to 0.7, outperforming
other markets with Sharpe ratios of approximately
0.4–0.5. Remarkably, the standard deviation of ΔIL
(45.31%) more than doubles that of RMRF (17.71%),
which contributes to significantly increase the volatility
of the SDF, as defined in expression (11).
Regarding correlations, Table 3 shows that RMRF is
strongly correlated with most portfolios under consider-
ation, with coefficients that exceed the 70% in the major-
ity of cases. With respect to illiquidity, it should be noted
that expression (13) considers ΔIL as measured at time t,
while asset returns are measured at time t + 1. In order
to determine the optimal number of lags for ΔIL, we use
the Akaike information criteria, which provide an opti-
mal lag number equal to 1 year. Accordingly, Table 3
shows the correlations between lagged ΔIL and portfolio
returns. Although the results show that ΔIL is far less
correlated with asset returns than RMRF, many correla-
tions range from 20% to 30%, which reveals a positive
relationship between the variation in market illiquidity
and stock returns.
In order to test the explanatory power of the model,
Table 4 and Figures 1 and 2 show the results provided by
the scaled CAPM, according to expression (13), as well as
those provided by the classic CAPM and the Fama–
French models. We use GMM to estimate together time-
series and cross-section parameters, correcting standard
errors for cross-sectional correlation and for the fact that
betas are generated regressors. Following Lewellen
et al. (2010), Table 4 shows both the adjusted OLS and
GLS R2 statistics for all models. As the authors explain,
the GLS R2 statistic constitutes a challenging check for
8 ROJO-SUÁREZ ET AL.

TABLE 2 Summary statistics

Panel A: 25 portfolios size-BE/ME

Book-to-market equity (BE/ME) quintiles

Means SD

Size Low 2 3 4 High Low 2 3 4 High

Small 101.43 88.20 91.39 93.03 87.17 173.99 135.94 158.39 121.54 91.39
2 42.32 81.06 51.24 53.60 54.60 67.68 208.33 85.55 65.24 74.09
3 25.20 30.96 29.78 31.62 51.14 42.46 44.98 38.98 48.11 88.49
4 23.98 22.84 21.43 25.79 34.48 42.69 32.66 30.23 27.11 41.20
Big 10.24 10.69 10.71 12.61 13.44 17.03 17.38 17.78 22.43 27.03
Panel B: 20 asset growth portfolios

Means SD
1–5 22.58 14.08 14.95 11.90 10.85 47.03 27.81 36.99 26.12 22.76
6–10 11.67 10.45 14.25 13.79 9.82 26.35 23.71 26.79 17.49 16.99
11–15 9.98 7.67 14.98 11.12 17.19 13.92 14.72 27.95 23.48 22.74
16–20 16.55 15.60 18.93 24.96 32.55 23.82 25.82 33.84 39.15 56.69

Panel C: 62 industry portfolios deciles

1 2 3 4 5 6 7 8 9 10
Means 9.42 10.65 11.67 12.22 14.45 16.22 17.29 19.14 24.57 40.87
SD 21.75 23.02 27.41 29.42 31.77 35.47 37.71 45.93 56.83 130.06

Panel D: Factors

FF5 factors FF3 factors Illiquidity

RMRF SMB HML RMW CMA RMRF SMB HML ΔIL

Means 12.46 41.46 6.96 12.12 −11.54 12.46 41.42 6.96 11.61
SD 17.71 63.22 25.63 36.03 27.32 17.71 66.83 25.63 45.31

Note: We compile monthly series from Thomson Reuters Datastream database, for all stocks listed in the London Stock Exchange in the
period from January 1989 to December 2018. Using this data, we form the following portfolios: (a) 25 portfolios size-BE/ME, (b) 20 asset
growth portfolios, and (c) 62 industry portfolios. In order to determine excess returns, when appropriate we use the three-month interest rate
of the Treasury Bill for the United Kingdom. All results are annual percentages.

assetpricing models, since it is high only if the model can
explain the maximum Sharpe ratio available on the test
assets. Conversely, the OLS R2 statistic is weakly related
to the factors' location in the mean–variance space.
Regardless of the specific sample, all results shown in
Table 4 allow us to conclude that the four models under
study perform quite similarly, displaying a good explana-
tory power in the majority of cases. In any case, the
Fama–French models (FF3 and FF5) provide the best
results, closely followed by the scaled CAPM. Although
the classic CAPM is the worst performing model, its
results are significantly better than those of previous liter-
ature, performing satisfactorily for all samples. Specifi-
cally, for size-BE/ME portfolios (Table 4, Panel A), the
classic CAPM provides an OLS R2 statistic of 69.1%, while
the scaled CAPM and the FF3 model provide R2 statistics
of 83.4% and 87.6%, respectively. The best performing
model is the FF5 model, with an OLS R2 statistic of
95.6%. Although these results worsen for asset growth
portfolios (Panel B), both the scaled CAPM and the
Fama–French models provide roughly the same OLS R2
statistics, with values around 75%. Remarkably, the GLS
R2 statistic falls strongly for all models, except the FF3
model, which means that RMRF is far from being mean–
variance efficient.
Table 4, Panel C, shows that all models perform
worse for industry portfolios, but still within acceptable
limits. The results are very similar for the four models
under consideration, with OLS R2 statistics of approxi-
mately 65% and the scaled CAPM providing the highest
GLS R2 statistic (62.3%). It is worth to note that the J-test
for overidentifying restrictions rejects all models in the
ROJO-SUÁREZ ET AL. 9

TABLE 3 Correlations
Panel A: 25 portfolios size-BE/ME

Book-to-market equity (BE/ME) quintiles

Size Low 2 3 4 High Low 2 3 4 High

RMRF ΔIL
Small 0.63 0.70 0.44 0.39 0.53 0.38 0.36 −0.10 −0.06 −0.01
2 0.67 0.60 0.59 0.67 0.66 0.29 0.30 −0.01 0.19 0.07
3 0.82 0.74 0.80 0.73 0.43 0.13 0.05 0.05 0.00 −0.16
4 0.80 0.82 0.83 0.84 0.71 0.19 0.13 0.16 0.22 0.05
Big 0.84 0.93 0.96 0.89 0.76 −0.01 0.20 0.20 0.20 0.09

Panel B: 20 asset growth portfolios

RMRF ΔIL
1–5 0.73 0.69 0.42 0.68 0.81 0.09 −0.17 −0.06 −0.07 0.13
6–10 0.89 0.80 0.87 0.71 0.89 0.23 0.16 0.24 0.23 0.17
11–15 0.85 0.79 0.89 0.82 0.73 0.12 0.21 0.22 −0.02 0.08
16–20 0.86 0.86 0.75 0.79 0.51 0.33 0.12 0.23 0.07 −0.29

Panel C: 62 industry portfolios deciles

RMRF ΔIL
1–5 0.41 0.47 0.55 0.57 0.64 −0.10 −0.02 0.01 0.04 0.07
6–10 0.69 0.72 0.75 0.80 0.93 0.11 0.15 0.22 0.28 0.48

Note: We compile monthly series from Thomson Reuters Datastream database, for all stocks
listed in the London Stock Exchange in the period from January 1989 to December 2018. Using
this data, we form the following portfolios: (a) 25 portfolios size-BE/ME, (b) 20 asset growth
portfolios, and (c) 62 industry portfolios. In order to determine excess returns, when appropriate
we use the three-month interest rate of the Treasury Bill for the United Kingdom. We use
annual series to estimate all correlations.

previous samples, while exactly the opposite is true for
industry portfolios. In any case, these results must be
interpreted with caution, since the J-test can easily reject
models with low pricing errors if variances and
covariances in the spectral density matrix are low
enough. Conversely, models with high pricing errors may
lead to false positives if they are correlated or highly
dispersed.
The fourth sample (Table 4, Panel D), which com-
prises all the previous data sets, provides satisfactory
results for all models, with OLS R2 statistics of 81.4% and
72% for the scaled CAPM and the classic CAPM, respec-
tively. Once again, the FF5 model outperforms all the
other models, with an OLS R2 statistic of 88.5%. As in the
previous samples, the GLS R2 statistics are significantly
lower, especially for the CAPM. In fact, GLS R2 statistics
are almost halved with respect to their OLS counterparts
for the scaled CAPM and the classic CAPM. On the other
hand, the GLS R2 statistics of the FF3 and FF5 models
decrease minimally, which seems to indicate that the fac-
tor-mimicking portfolio implicit in these models is close
to be mean–variance efficient. Noteworthy, the J-test for
overidentifying restrictions does not reject any model, as
was the case with industry portfolios.
Figures 1 and 2 show that fitted values satisfactorily
track the expected returns for the majority of the assets
under consideration. Table 4 shows that in most cases
the Fama–French models provide slightly lower mean
absolute errors (MAEs) than the other models, although
the differences are more significant for size-BE/ME port-
folios. Particularly, in this case the MAE for the scaled
CAPM amounts to 8.28%, while it falls to 4.21% in the
FF5 model. As shown in Figure 1, the abnormal returns
of size portfolios in the first quintile largely explain these
results.
It should be noted that, in general, estimates for
λ(RMRF) in both the scaled CAPM and the classic CAPM
are statistically significant, while in Fama–French
models, only λ(SMB) is statistically significant in the
majority of the samples. On the other hand, Panel D in
Table 4 shows that all risk prices are very close to the
means of the factors (see Table 2) for models FF3 and
 10

TABLE 4 Regression results for different sorts of portfolios

Row Model Intercept λ(RMRF) λ(SMB) λ(HML) λ(RMW) λ(CMA) λ(ΔIL) λ(RMRFΔIL MAE (%) R2 J-test
Panel A: 25 portfolios size-BE/ME
1 Scaled CAPM −.081 .226 −.126 −.018 8.28 .834 .542 120.782
(.118) (.104) (.269) (.047) (.000)
2 CAPM .063 .154 11.16 .691 .461 216.462
(.087) (.072) (.000)
3 FF3 −.090 .208 .430 .136 7.29 .876 .840 124.783
(.166) (.158) (.139) (.076) (.000)
4 FF5 −.070 .178 .398 .094 .092 −.086 4.21 .956 .775 125.077
(.169) (.168) (.126) (.063) (.134) (.099) (.000)
Panel B: 20 asset growth portfolios
5 Scaled CAPM .014 .112 −.122 −.013 2.45 .733 −.125 112.993
(.051) (.059) (.141) (.037) (.000)
6 CAPM .004 .128 2.87 .582 .082 130.313
(.050) (.060) (.000)
7 FF3 .067 .056 .342 −.003 1.91 .788 .718 148.218
(.047) (.059) (.155) (.070) (.000)
8 FF5 .058 .064 .311 −.001 .119 −.078 1.89 .778 .400 138.151
(.057) (.067) (.158) (.066) (.099) (.075) (.000)
Panel C: 62 industry portfolios
9 Scaled CAPM .045 .087 .044 .027 3.34 .625 .503 30.261
(.034) (.046) (.124) (.031) (.999)
10 CAPM .048 .083 3.34 .636 .623 37.616
(.044) (.055) (.990)
11 FF3 .041 .081 .217 .017 3.24 .667 .526 35.621
(.042) (.055) (.140) (.086) (.991)
12 FF5 .048 .076 .206 .014 .119 −.031 3.23 .666 .512 35.615
(.036) (.044) (.129) (.086) (.094) (.075) (.985)
Panel D: All portfolios
13 Scaled CAPM 5.85 .814 .411
ROJO-SUÁREZ ET AL.
ROJO-SUÁREZ ET AL. 11

GMM to estimate all models, assuming a spectral density matrix with zero leads and lags. We use the same spectral density matrix to run the J-test. The table displays two rows for each model,
portfolios and 62 industry portfolios. In order to determine excess returns, where appropriate we use the three-month interest rate of the Treasury Bill for the United Kingdom. Depending on
the model, we use either the market portfolio or the Fama–French factors as explanatory variables. In models 1, 5, 9 and 13, we scale the market portfolio using ΔIL as an instrument. We use
Note: We use all stocks listed in the London Stock Exchange, for the period from January 1989 to December 2018, to estimate the annual returns of 25 portfolios size-BE/ME, 20 asset growth
FF5. Although the disparities between these estimates

(1.000)

(1.000)

(1.000)
35.129

29.307

27.338
J-test are higher in the case of the scaled CAPM, in this
model, λ(RMRF) and E(RMRF) are not directly compa-
rable given the extra terms considered in expression
(13) to capture the time-varying nature of the expected
.720 .443

.846 .787

.885 .779
return of the wealth portfolio.
All the previous results test the validity of the model
R2

where the first row shows the estimates for the parameters and the second row shows the standard errors. Additionally, adjusted OLS and GLS R2 statistics are provided.
according to expression (13) or, equivalently, expression
(21). However, the economic content of the model can
MAE (%)

also be evaluated by studying the pricing errors that

6.36

5.32

4.88

arise when a set of actively managed portfolios, formed

according to the variation in market illiquidity in the
previous year, are priced using the CAPM, consistently
λ(RMRFΔIL

with expression (22). Consequently, Table 5 and

Figure 3 show the results provided by the CAPM on
−.004
(.034)

four different samples of managed portfolios, each

being determined as the product of the portfolios
included in the four original samples and ΔIL in the
λ(ΔIL)

previous year.
−.132
(.162)

As shown, OLS R2 statistics are close to 90% in all

samples, except for the 20 portfolios resulting from con-
trolling original asset growth portfolios for market illi-
λ(CMA)

quidity (sample 2 in Table 5). In this case, the OLS R2

−.162
(.068)

statistic amounts to 51.4%, a result very similar to that

provided by the CAPM in Table 4 for asset growth port-
folios. Figure 3 reveals that the highest pricing errors
λ(RMW)

correspond to portfolios number 19 and 20, that is,

(.082)
.148

those comprising firms with the highest asset growth.

As in previous samples, the GLS R2 statistics decrease
in all cases with respect to their OLS counterparts, and
λ(HML)

most notably for industry portfolios. In any case, it is

(.065)

(.065)
.102

.055

remarkable that, although the J-test for overidentifying

restrictions rejects the model in all cases, MAEs are sig-
nificantly lower than those shown in Table 4.
λ(SMB)

(.133)

(.126)

In short, all the results shown above are indicative

.423

.388

of a strong increase in the explanatory power of the

CAPM for the United Kingdom. Using a large sample
λ(RMRF)

of 107 portfolios, which combines different sorting

criteria, the classic constant beta model provides signifi-
(.083)

(.065)

(.075)

(.071)
.199

.156

.126

.117

cantly better results than those obtained by the previ-

ous literature, with OLS R2 statistics ranging from 72%
to 86.2%, depending on whether the test assets are
Intercept

scaled by market illiquidity or not. In this last case, the

−.074

−.018

−.023

−.014
(.079)

(.061)

(.063)

(.062)

CAPM provides an OLS R2 statistic of 81.4% when we

control betas for the variation in market illiquidity, and
(Continued)

the J-test for overidentifying restrictions does not reject

the model.
Model

CAPM

FF3

FF5

4 | C ON C L US I ON
TABLE 4

Row

Recent literature shows that increased trading activity

14

15

16

and liquidity levels in stock markets have significantly

12 ROJO-SUÁREZ ET AL.

F I G U R E 1 Realized excess returns versus fitted values for different sorts of portfolios. We use all stocks listed in the London Stock
Exchange, for the period from January 1989 to December 2018, to estimate the annual returns of 25 portfolios size-BE/ME, 20 asset growth
portfolios and 62 industry portfolios. In order to determine excess returns, where appropriate we use the three-month interest rate of the
Treasury Bill for the United Kingdom. Depending on the model, we use either the market portfolio or the Fama–French factors as
explanatory variables. Scaled CAPM scales the market portfolio using ΔIL as an instrument. We depict each of the 25 portfolios size-BE/ME
according to a code with two numbers, the first number being the size code (with 1 being the smallest and 5 the largest) and the second
number being the BE/ME ratio code (with 1 representing a low ratio and 5 a high ratio). Asset growth portfolios are represented by a
number that ranges from 1 to 20, where 1 corresponds to a portfolio comprising firms with the lowest asset growth, and 20 is a portfolio
comprising firms with the highest asset growth. We depict industry portfolios according to the letter “I” followed by the first two digits of the
SIC code

downsized the spreads provided by a large number of particularly the CAPM, will provide better results than
anomaly-based trading strategies and, consequently, have those achieved in previous research. Using data for the
enhanced market efficiency. In this framework, one London Stock Exchange, ranging from January 1989 to
would expect that classic assetpricing models, and more December 2018, our results show that the classic CAPM
ROJO-SUÁREZ ET AL. 13

F I G U R E 2 Realized excess returns versus fitted values for all portfolios under consideration. We use all stocks listed in the London
Stock Exchange, for the period from January 1989 to December 2018, to estimate the annual returns of 25 portfolios size-BE/ME, 20 asset
growth portfolios and 62 industry portfolios. In order to determine excess returns, where appropriate we use the three-month interest rate of
the Treasury Bill for the United Kingdom. Depending on the model, we use either the market portfolio or the Fama–French factors as
explanatory variables. Scaled CAPM scales the market portfolio using ΔIL as an instrument. We depict each of the 25 portfolios size-BE/ME
according to a code with two numbers, the first number being the size code (with 1 being the smallest and 5 the largest) and the second
number being the BE/ME ratio code (with 1 representing a low ratio and 5 a high ratio). Asset growth portfolios are represented by a
number that ranges from 1 to 20, where 1 corresponds to a portfolio comprising firms with the lowest asset growth, and 20 is a portfolio
comprising firms with the highest asset growth. We depict industry portfolios according to the letter “I” followed by the first two digits of the
SIC code

TABLE 5 Regression results for different sorts of managed portfolios

Row Test assets Intercept λ(RMRF) MAE (%) R2 J-test

1 25 portfolios size-BE/ME −.036 .074 2.30 .885 .608 169.907
(.033) (.090) (.000)
2 20 asset growth portfolios −.018 .078 1.12 .514 .426 48.361
(.018) (.072) (.000)
3 61 industry portfolios −.014 .067 1.08 .893 .267 351.821
(.016) (.082) (.000)
4 All portfolios −.018 .069 1.45 .862 .603 274.425
(.017) (.087) (.000)

Note: We use all stocks listed in the London Stock Exchange, for the period from January 1989 to December 2018, to estimate the annual
returns of 25 portfolios size-BE/ME, 20 asset growth portfolios and 62 industry portfolios. In order to determine excess returns, where appro-
priate we use the three-month interest rate of the Treasury Bill for the United Kingdom. Subsequently, we create three samples of managed
portfolios, each being determined as the product of the portfolios included in the original samples and ΔIL in the previous year. We use the
market portfolio as explanatory variable. We use GMM to estimate all models, assuming a spectral density matrix with zero leads and lags.
We use the same spectral density matrix to run the J-test. The table displays two rows for each sample, where the first row shows the esti-
mates for the parameters and the second row shows the standard errors. Additionally, adjusted OLS and GLS R2 statistics are provided.

performs satisfactorily for portfolios sorted according to a
variety of market anomalies. Furthermore, when we con-
trol the time-varying nature of parameters for shifts in
the market illiquidity, as measured by the Amihud illi-
quidity measure, the CAPM provides results close to
those of the Fama–French models.
These results raise several questions about the
apparent validity of the scaled CAPM. First, further
research should be addressed in order to determine the
prevalence of these results for other markets and
assets. Given the implications of the higher trading
activity underlined by recent literature on the topic,
one may expect that the higher the liquidity of the mar-
ket, the better the results provided by the CAPM. How-
ever, this point must be empirically evaluated, since
the results provided by the model are highly influenced
by the characteristics of the market under analysis
(Mohanty, 2019).
14 ROJO-SUÁREZ ET AL.

F I G U R E 3 Realized excess returns versus fitted values for different sorts of managed portfolios. We use all stocks listed in the London
Stock Exchange, for the period from January 1989 to December 2018, to estimate the annual returns of 25 portfolios size-BE/ME, 20 asset
growth portfolios and 62 industry portfolios. In order to determine excess returns, where appropriate we use the three-month interest rate of
the Treasury Bill for the United Kingdom. Subsequently, we create three samples of managed portfolios, each being determined as the
product of the portfolios included in the original samples and ΔIL in the previous year. We use the market portfolio as explanatory variable.
We depict each of the 25 managed portfolios size-BE/ME according to a code with two numbers, the first number being the size code (with
1 being the smallest and 5 the largest) and the second number being the BE/ME ratio code (with 1 representing a low ratio and 5 a high
ratio). Asset growth managed portfolios are represented by a number that ranges from 1 to 20, where 1 corresponds to a portfolio comprising
firms with the lowest asset growth, and 20 is a portfolio comprising firms with the highest asset growth. We depict managed industry
portfolios according to the letter “I” followed by the first two digits of the SIC code

Second, efforts should be made to reconcile the
mechanics of the CAPM with the preferences of inves-
tors, as defined by modern utility functions. Although the
CAPM constitutes a particular case of consumption-based
assetpricing models, the assumptions that allow us to
connect them are, in general, unrealistic. Preferences
such as those described by quadratic utility of log utility
do not seem to correctly capture the rationality of inves-
tors. Therefore, research on the implications of the
eventual empirical success of the CAPM for the prefer-
ences described by non-separable utility functions is
imperative.
Third, recent research emphasizes the importance of
market frictions, such as those tied to labour markets
(Kuehn, Simutin, & Wang, 2017). Other highlights the
relevance of specific market variables, such as the volatil-
ity risk (Campbell et al., 2018). In this framework, future
research should deepen the understanding of the
ROJO-SUÁREZ ET AL.
relationship between these variables and the wealth port-
folio, in order to determine the degree to which the
wealth portfolio has subsumed these variables or these
effects have diminished.
Finally, further research on the factors that drive the
relationship between high trading activity and the CAPM
is mandatory. For this purpose, models linking asset
prices with low trading costs and market microstructure
(Acharya & Pedersen, 2003; Amihud, Mendelson, &
Pedersen, 2006) can contribute significantly to a better
understanding of that relationship. In parallel with this,
research on the interplay between funding liquidity and
trading cost (Brunnermeier & Pedersen, 2007; Gârleanu &
Pedersen, 2011) can greatly enrich this analysis.
DATA AVAILABILITY STATEMENT
The data that support the findings of this study are
openly available in Mendeley Data at http://dx.doi.org/
10.17632/56n2yxgpcf.2
ORCID
Javier Rojo-Suárez https://orcid.org/0000-0002-7371-
3154
Ana Belén Alonso-Conde https://orcid.org/0000-0001-
8333-2788
Ricardo Ferrero-Pozo https://orcid.org/0000-0003-0587-
691X
E N D N O T ES
1 ket anomalies attenuated in the recent era of high liquidity and
This literature is too large to summarize here. Seminal contribu-
tions are Shiller (1981), Campbell and Shiller (1988) and Fama
and French (1988).
2
Not necessarily in the payoff space.
3 Princeton University Press.
When the payoff space only includes excess returns, the subjective
discount factor is irrelevant.
4
In addition to log utility, there are many other alternative
assumptions that lead to the CAPM. Chapter 9 in Cochrane (2005)
provides a complete review on the topic.
5
All data is publicly available at Rojo-Suárez, Alonso-Conde, and
Ferrero-Pozo (2020).
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How to cite this article: Rojo-Suárez J, Alonso-
Conde AB, Ferrero-Pozo R. Liquidity, time-varying
betas and anomalies: Is the high trading activity
enhancing the validity of the CAPM in the UK
equity market? Int J Fin Econ. 2020;1–16. https://
doi.org/10.1002/ijfe.2136