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The purpose of this study is to examine the performances of liquidity factors in the stock market cycle. It aims to investigate whether the contribution of liquidity factors changes with stock market trends.

Six liquidity proxies and two-factor construction methods are compared in this study. The spanning regression method was applied to examine the contribution of liquidity factors to the asset pricing model, while the Fama and MacBeth regression method was used for examining the pricing power of liquidity factors.

The result shows that liquidity factors are accretive to models explaining returns in bull markets but not accretive to models in bear markets. The most appropriate method of constructing liquidity factors in the Japanese stock market has also been clarified.

In the Japanese stock market, there has never been a comprehensive test of the role of the liquidity risk factor in different market trends using the long-run data. This study helps with identifying the importance of liquidity pricing risk in different market trends. It also fills the gaps by comparing liquidity factors that are constructed through different methods and proxies and provides evidence for further confirming the correct asset pricing model in the future.

Understanding the pricing of real estate equities is a central objective of real estate research. This paper aims to investigate the impact of liquidity on European real estate equity returns, after accounting for well-documented systematic risk factors.

Based on risk factors derived from general equity data, the authors extend the Fama-French time-series regression approach by a liquidity factor, using a pan-European sample of 272 real estate equities.

The empirical results indicate that liquidity is a significant pricing factor in real estate stock returns, even after controlling for market, size and book-to-market factors. In addition, the authors detect that real estate stock returns load predominantly positively on the liquidity risk factor, suggesting that real estate equities tend to behave like illiquid common equities. These findings are underpinned by a series of robustness checks. Running a comparative analysis with alternative factor models, the authors further demonstrate that the liquidity-augmented asset-pricing model is most appropriate for explaining European real estate stock returns.

The inclusion of sentiment and downside risk factors could provide further insights into real estate asset pricing in European capital markets.

This is the first study to examine the role of liquidity as a systematic risk factor in a pan-European setting.

The aim of this paper is to examine the role of liquidity in asset pricing in a tiny market, such as the Portuguese. The unique setting of the Lisbon Stock Exchange with regards to changes in classification from an emerging to a developed stock market, allows an original answer to whether changes in the development of the market affect the role of liquidity in asset pricing.

The authors propose and compare two alternative implications of liquidity in asset pricing: as a desirable characteristic of stocks and as a source of systematic risk. In contrast to prior research for major stock markets, they use the proportion of zero returns which is an appropriated measure of liquidity in tiny markets and propose the separated effects of illiquidity in a capital asset pricing model framework over the whole sample period as well as in two sub-samples, depending on the change in classification of the Portuguese market, from an emerging to a developed one.

The overall results of the study show that individual illiquidity affects Portuguese stock returns. However, in contrast to previous evidence from other markets, they show that the most traded stocks (hence the most liquid stocks) exhibit larger returns. In addition, they show that the illiquidity effects on stock returns were higher and more significant in the period from January 1988 to November 1997, during which the Portuguese stock market was still an emerging market.

These findings are relevant for investors when they make their investment decisions and for market regulators because they reflect the need of improving the competitiveness of the Portuguese stock market. Additionally, these findings are a challenge for academics because they exhibit the need for providing alternative theories for tiny markets such as the Portuguese one.

The results have important implications for individual and institutional investors who can take into account the peculiar effect of liquidity in stock returns to make proper investment decision.

The Portuguese market provides a natural experimental area to analyse the role of liquidity in asset pricing, because it is a tiny market and during the period studied it changed from an emerging to a developed stock market. Moreover, the authors have to highlight that previous evidence almost exclusively focuses on the US and major European stock markets, whereas studies for the Portuguese one are scarce. In this context, the study provides an alternative methodological approach with results that differ from those theoretically expected. Thus, these findings are a challenge for academics and open a theoretical and a practical debate.

This paper aims to study the impact of liquidity risk and transaction costs on stock pricing in Iran, a closed market operating under a financial embargo and compare the results with those of an important neighboring market, namely, Turkey.

This study follows Liu et al. (2016) and incorporates liquidity risk and transaction costs into the traditional consumption-based asset-pricing model (CCAPM) from 2009 to 2017. Effective transaction costs are estimated a la Hasbrouck (2009) and liquidity risk according to eight different criteria.

According to the results, both liquidity risk and transaction costs are higher in Iran, possibly due to the financial embargo. Thus, relative to Turkey, this paper should expect a higher increase in the CCAPM pricing performance in Iran when accounting for these two variables. The results are in line with this expectation and indicate that adjusting the CCAPM significantly increases its pricing performance in both countries, but relatively more in Iran.

This study compares liquidity risk and transaction costs in an economy under the extreme case of a financial embargo to an open yet in other important aspects similar economy from the same region.

The purpose of this paper is to investigate whether liquidity risk (i.e. the returns’ vulnerability to the unexpected changes in overall market liquidity) is a priced risk factor in China. Moreover, it investigates the potential role of a stock’s information quality in reducing its liquidity risk during the period of post-non-tradable shares reforms in China.

The authors collect data of all the A-share issuing firms listed either on the Shanghai Stock Exchange or Shenzhen Stock Exchange during the period 2006–2016. The authors perform two-stage cross-sectional regression testing. First, the authors perform firm-specific time-series regressions of excess returns over Fama–French’s three-factor model and a liquidity factor. Second, to test whether firm-specific liquidity risk is a priced risk factor, the authors apply Fama and MacBeth’s regressions.

Firm-level asset pricing tests provide substantial evidence for market pricing of liquidity risk in China. The authors find a significant negative association between information quality and liquidity risk. The authors also find that the reduction in liquidity risk induced by better information quality is substantial enough to reduce required returns. These findings are robust to alternative measures of liquidity risk and information quality.

The study underscores that a policy initiative to enhance the information environment can significantly reduce the market volatility in China.

To the best of authors’ knowledge, this is the first study that considers the Shanghai Stock Exchange as well as Shenzhen Stock Exchange to investigate market pricing of liquidity risk in China.

Since illiquidity risk is one of the most important pricing factors of assets, the aim of this paper is to evaluate the suitability of proxies of illiquidity prevalent in the asset pricing literature and their explanatory power in asset pricing tests.

Using the available high‐frequency intra‐day data, the paper constructs some proxies of illiquidity as benchmarks and then evaluates proxies of illiquidity based on inter‐day data.

The empirical results provide convincing evidence that turnover is the most suitable proxy of illiquidity in the Chinese stock market. It is not only hghly related to intra‐day data‐based proxies of illiquidity but also completely superior to other measures of illiquidity in asset pricing tests.

First, the paper applies illiquidity measurements from microstructure theory and the available high‐frequency data, and examines the suitability of illiquidity proxies in asset pricing literature in the Chinese stock market. Rational basics are provided to test the applicability of illiquidity measures in the Chinese stock market. Second, the paper introduces illiquidity proxies into asset pricing models to extend their explanatory power. The paper's results may help researchers to select illiquidity proxies more cautiously.

The purpose of this paper is to estimate the effects of liquidity on corporate bond spreads.

Using a systematic liquidity factor extracted from the yield spreads between on- and off-the-run Treasury issues as a state variable, the authors jointly estimate the default and liquidity spreads from corporate bond prices.

The authors find that the liquidity factor is strongly related to conventional liquidity measures such as bid-ask spread, volume, order imbalance, and depth. Empirical evidence shows that the liquidity component of corporate bond yield spreads is sizable and increases with maturity and credit risk. On average the liquidity spread accounts for about 25 percent of the spread for investment-grade bonds and one-third of the spread for speculative-grade bonds.

The results show that a significant part of corporate bond spreads are due to liquidity, which implies that it is not necessary for credit risk to explain the entire corporate bond spread.

The results show that returns from investments in corporate bonds represent compensations for bearing both credit and liquidity risks.

It is a novel approach to extract a liquidity factor from on- and off-the-run Treasury issues and use it to disentangle liquidity and credit spreads for corporate bonds.

The paper investigates whether stock liquidity of firms is valued by lending banks revealing that firms with higher liquidity in the capital market pay lower spreads for the loans they obtain. This relationship is causal as evidenced by using the decimalization of tick size as an exogenous shock-to-stock liquidity in a difference-in-differences setting. Reduction in financial constraint and improvement in corporate governance induced by higher stock liquidity are potential mechanisms through which liquidity impacts loan spreads. These higher liquidity firms also receive less stringent nonprice loan terms, for example, longer loan maturity and less required collateral.

The purpose of this paper is to evaluate the pricing implication of aggregate market wide investor sentiment risk for cross sectional return variation in the presence of other market wide risk factors.

The paper employs the Fama and French time series regression approach to examine the impact of market risk premium, size, book‐to‐market equity, momentum and liquidity as risk factors on stock return. Given the importance of inherent imperfect rationality or sentiment risk, the paper further investigates the impact of investor sentiment on the cross section of stock return.

The choice of a five factor model is apparently persuasive for consideration in investment decisions. Stocks are hard to value and difficult to arbitrage with characteristics which are significantly influenced with the sentiment risk. It is naïve to argue for the universal pricing implication of sentiment risk in a multifactor model framework.

The test assets portfolios are not segregated as per any industry criteria.

Investment managers can use a contrarian investment strategy, for the stocks that are hard to value and riskier to arbitrage to gain excess return when the market follows a downward trend.

This makes the first attempt towards the investigation of the impact of the sentiment risk on cross sectional return variation from an emerging market perspective on such a diversified and large test asset portfolios. The paper has extended the available literature by investigating the impact of sentiment risk after controlling the liquidity risk factor in a multifactor specification. This measure of market wide irrational sentiment index is more comprehensive.

The purpose of this study is to systematically review and analyze the literature in the area of liquidity of financial markets. The study summarizes the key findings and approaches and highlights the research gaps in the extant literature.

A variety of reputed databases are utilized to select 100 research papers, from a large pool of nearly 3,000 research papers spanning between 1972 and 2018 using systematic literature review methodology. The selected research papers are organized to provide an in-depth analysis and an account of the ongoing research in the area of liquidity. The study uses bibliometric network visualization and word-cloud analyses to compile and analyze the literature.

The study summarizes the recent approaches in the liquidity research on aspects such as methodologies followed, variables applied, sub-areas covered, and the types of economies and markets covered. The article shows that the literature on liquidity in the emerging markets (e.g. China and India) is deficient. Overall, the following research areas related to liquidity need further exploration in the context of emerging markets: liquidity beyond the best bid-ask quotes, intraday return predictability using microstructure variables (e.g. order imbalances), impact of algorithmic-trading and volatility of liquidity.

To the best of authors’ knowledge, in the recent past, a detailed account of the literature on liquidity has not been published. It provides a comprehensive collection and classification of the literature on the liquidity of financial markets. This would be helpful to the future researchers, academics and practitioners in the area of financial markets.