The Pricing of the Illiquidity Factor’s Conditional Risk with Time-varying Premium

We test the pricing of the conditional systematic risk (β) of IML, a traded liquidity factor of the return premium on illiquid-minus-liquid stocks, with its risk premium varying over time. We find a positive and significant risk premium on conditional IML β, which rises in times of financial distress, measured by the corporate bond yield spread or broker–dealer loans (including margin loans). The conditional IML β remains significantly priced across individual stocks after controlling for the unconditional and conditional βs of the Fama-French and Carhart factors, as well as some common liquidity-based factors