Abstract
This study attempts to disentangle the effect of liquidity and information asymmetry on the pricing of securities at Bombay Stock Exchange with a sample of S&P BSE 500 stocks for a time span ranging from 1st April 2000 to 31st March 2017. Firstly, we checked for the stationarity of liquidity and information premium, then employed regression models and finally Granger causality test to identify the cause and effect relationship between them. Empirical evidence indicates the stationarity of liquidity and information premium and a significantly positive relationship is observed between them. Also, it shows that information premium Granger causes liquidity premium, therefore, information factor might not be independent of liquidity factor as it contains information that helps in predicting liquidity premium. This implies that liquidity-based trading strategy and information-based trading strategy can be used by investors mutually rather than distinctly to reap abnormal returns.
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