As opposed to the “low beta low risk” convention, we show that low beta stocks are illiquid and exposed to high liquidity risk. After adjusting for liquidity risk, low beta stocks no longer outperform high beta stocks. Although investors who “bet against beta” earn a significant beta...

Employment growth (EG) is likely related to liquidity fundamentals of investment opportunities, firm health, and information environment. This, in turn, implies that liquidity risk may play a role in explaining the relation between employment growth and stock returns. We explain the link between...

In this paper, we make a liquidity adjustment to the consumption-based capital asset pricing model (CCAPM) and show that the liquidity-adjusted CCAPM is a generalized model of Acharya and Pedersen (2005). Using different proxies for transaction costs such as the effective trading costs measure...

In this paper, we propose a liquidity risk adjustment to the Epstein and Zin (1989, 1991) model and assess the adjusted model's performance against the traditional consumption pricing models. We show that liquidity is a significant risk factor and it adds considerable explanatory power to the...

A vast literature has documented the value premium and the small firm effect as pervasive stylized facts in empirical asset pricing and yet research has been largely unable to provide entirely convincing explanations of why these phenomena exist. This paper demonstrates that the cross-sectional...