We review the theories on how liquidity affects the required returns of capital assets and the empirical studies that test these theories. The theory predicts that both the level of liquidity and liquidity risk are priced, and empirical studies find the effects of liquidity on asset prices to be...

Merton's recent extension of the capital asset pricing model proposed that asset returns are an increasing function of their beta risk, residual risk, and size, and a decreasing function of the public availability of information about them. Associating the latter with asset liquidity and...

The effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than six months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between...

The authors study the joint effect of the trading mechanism and the time at which transactions take place on the behavior of stock returns using data from Japan. The Tokyo Stock Exchange employs a periodic clearing procedure twice a day, at the opening of both the morning and the afternoon...

Merton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum trading unit-the number of shares in a "round lot"-which facilitates trading in the stock by small investors. We find that a reduction in the minimum...