Asset Pricing and the Illiquidity Premium

In this paper, we examine the asset-pricing role of liquidity (as proxied by share turnover) in the context of the Fama and French (1993) three-factor model. Our analysis employs monthly Australian data, covering the sample period from 1990 to 1998. The key finding of our research is that the main test is unable to reject the test of over-identifying restrictions, thus supporting the overall favorability of the liquidity augmented Fama-French model. In addition, we find that the asset- pricing performance of the liquidity factor is generally very robust to a wide range of sensitivity checks