Asset Liquidity and Stock Returns: Evidence from Indian Market

Asset liquidity management is driven by state-contingent factors that affect investment opportunity sets available to the investors. We investigate whether the nature of asset liquidity, which affects firms’ ability to create value, is reflected in the cross-section of stock returns. In this regard, we extend Fama and French three-factor model by adding asset liquidity related mimicking portfolio. Using generalized method of moments, we test the model using ten-year monthly data on non-financial firms listed on Indian stock market. We find that the added factor is significant in the returns on low and high asset liquidity portfolios and behaves as expected. Low asset liquidity portfolios compensate investors for assuming asset liquidity risk while high asset liquidity portfolios offer hedge against it.

کلیدواژه ها:

asset pricing ، asset liquidity ، stock returns ، Indian stock market ، emerging markets