Abstract
Using the new CRSP compilation of daily trading volume data from 1926 to 1962, this paper conducts a detailed analysis of liquidity from 1926 to 2005. It distinguishes liquidity risk from liquidity as a characteristic and presents new evidence on the importance of liquidity risk in asset pricing. The liquidity risk premium is as strong in the pre-1963 period as in the post 1963-period, and is the most significant and persistent premium in a comparison with size, value, and momentum premiums. Liquidity as a firm characteristic lacks significant predictive power beyond liquidity risk and the liquidity-augmented CAPM provides a good description of expected returns.
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