Small Firm Effect, Liquidity and Security Returns

Standard asset pricing models ignore the costs of liquidity. In this study we advance the ongoing debate on empirical asset pricing and test if liquidity costs (as proxied by turnover rate, turnover ratio and bid-ask spread) affect stock returns for Australian stocks. Our tests use the factor portfolio mimicking approach of Fama and French (1993, 1996). We find small and less liquid firms generate positive risk premia after controlling for market returns and firm size. We find no evidence of any seasonal effects that can explain our multifactor asset pricing model findings. In summary, our study provides support for a broader asset pricing model with multiple risk factors.

[1]  M. Drew,et al.  Principal and Agent Problems in Superannuation Funds , 2003 .

[2]  Abbas Valadkhani,et al.  Measuring the impact of natural disasters on capital markets: an empirical application using intervention analysis , 2003 .

[3]  T. Naughton,et al.  Is idiosyncratic volatility priced?: Evidence from the Shanghai Stock Exchange , 2003 .

[4]  A. Worthington,et al.  A multivariate GARCH analysis of the domestic transmission of energy commodity prices and volatility: A comparison of the peak and off-peak periods in the Australian electricity spot market Discussion Paper No. 140 , 2003 .

[5]  A. Valadkhani.  DISCUSSION PAPERS IN ECONOMICS, FINANCE AND INTERNATIONAL COMPETITIVENESS History Of Macroeconometric Modelling: Lessons From Past Experience , 2003 .

[6]  A. Worthington,et al.  Tests of the random walk hypothesis for Australian electricity spot prices: An application employing multiple variance ratio tests , 2004 .

[7]  A. Worthington,et al.  The relationship between energy spot and futures prices: Evidence from the Australian electricity market , 2004 .

[8]  Y. Amihud,et al.  Asset pricing and the bid-ask spread , 1986 .

[9]  Donald B. Keim,et al.  Predicting returns in the stock and bond markets , 1986 .

[10]  Y. Amihud,et al.  Illiquidity and Stock Returns: Cross-Section and Time-Series Effects , 2000 .

[11]  Ben S. Branch.  A Tax Loss Trading Rule , 1977 .

[12]  R. Banz,et al.  The relationship between return and market value of common stocks , 1981 .

[13]  Nils S. Tuchschmid,et al.  Are liquidity and corporate control priced by shareholders? Empirical evidence from Swiss dual class shares , 1997 .

[14]  M. Drew,et al.  Retail Superannuation Management in Australia: Risk, Cost and Alpha , 2003 .

[15]  Thomas F. Cooley,et al.  Tax Distortions in a Neoclassical Monetary Economy , 1992 .

[16]  A. Worthington,et al.  Systematic features of high-frequency volatility in Australian electricity markets: Intraday patterns, information arrival and calendar effects , 2004 .

[17]  R. Faff,et al.  An investigation into the role of liquidity in asset pricing: Australian evidence , 2003 .

[18]  H. Stoll.  Chapter 9 - Market Microstructure , 2003 .

[19]  T. Naughton,et al.  ASSET PRICING IN CHINA: EVIDENCE FROM THE SHANGHAI STOCK EXCHANGE , 2003 .

[20]  E. Fama,et al.  Multifactor Explanations of Asset Pricing Anomalies , 1996 .

[21]  Y. Amihud,et al.  Illiquidity and Stock Returns II: Cross-Section and Time-Series Effects , 2018, The Review of Financial Studies.

[22]  Andrew C. Worthington,et al.  Tests of random walks and market efficiency in Latin American stock markets: An empirical note. Discussion Paper No. 157 , 2003 .

[23]  Shalini Singh.  RISK AND RETURN REVISITED¤ , 2003 .

[24]  Tarun Chordia,et al.  Alternative factor specifications, security characteristics, and the cross-section of expected stock returns , 1998 .

[25]  Donald B. Keim,et al.  The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects , 1996 .

[26]  Ben R. Marshall,et al.  Liquidity and stock returns in pure order-driven markets: evidence from the Australian stock market , 2003 .

[27]  R. Heaney,et al.  Size and Book to Market Effects in Australian Share Markets: A Time Series Analysis , 1999 .

[28]  Paul R. Milgrom,et al.  Bid, ask and transaction prices in a specialist market with heterogeneously informed traders , 1985 .

[29]  Gady Jacoby,et al.  On Asset Pricing and the Bid-Ask Spread , 2001 .

[30]  Radhika Lahiri.  Cooperation v/s Non-cooperation in R&D Competition with Spillovers , 2003 .

[31]  Rodney C. Wolff,et al.  Statistical Tests for Lyapunov Exponents of Deterministic Systems , 2003 .

[32]  Marc Robinson,et al.  Best Practice in Performance Budgeting , 2002 .

[33]  Radhika Lahiri.  A Further Exploration of Some Computational Issues in Equilibrium Business Cycle Theory: Discussion Paper No. 136 , 2003 .

[34]  Andrew C. Worthington,et al.  Weak-form market efficiency in European emerging and developed stock markets , 2003 .

[35]  M. Drew,et al.  A Review of Australia’s Compulsory Superannuation Scheme After a Decade , 2003 .

[36]  Andrew C. Worthington,et al.  Debt as a source of financial stress in Australian households , 2003 .

[37]  Stanley G. Eakins,et al.  Do Momentum Strategies Work? , 2004 .

[38]  E. Fama,et al.  Efficient Capital Markets : II , 2007 .

[39]  W. Sharpe.  CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK* , 1964 .

[40]  Andrew C. Worthington,et al.  Emergency Funds in Australian Households: An Empirical Analysis of Capacity and Sources , 2004 .

[41]  Andrew C. Worthington,et al.  Emergency finance in Australian households: An empirical analysis of capacity and sources. Discussion paper No 163 , 2003 .

[42]  Tracey West,et al.  Macroeconomic Risk Factors in Australian Commercial Real Estate, Listed Property Trust and Property Sector Stock Returns: A Comparative Analysis Using Garch-M , 2006 .

[43]  Marc Robinson.  Tightening the Results/Funding Link in Performance Budgeting Systems , 2003 .

[44]  A single-period model and some empirical evidences for optimal asset allocation with value-at-risk constraints , 2003 .

[45]  Boon L. Lee.  Interstate Comparison of Output and Productivity in the Australian Agricultural Sector, 1991 to 1999, Discussion Paper No 161 , 2003 .

[46]  R. C. Merton,et al.  AN INTERTEMPORAL CAPITAL ASSET PRICING MODEL , 1973 .

[47]  F. Black.  Capital Market Equilibrium with Restricted Borrowing , 1972 .

[48]  Marc Robinson.  THE OUTPUT CONCEPT AND PUBLIC SECTOR SERVICES , 2003 .

[49]  Long and Short-Run Determinants of Money Demand in New Zealand: Evidence from Cointegration Analysis , 2003 .

[50]  Robert Radcliffe,et al.  Liquidity and stock returns: An alternative test , 1998 .

[51]  A. G. Barnett,et al.  A time-domain test for some types of nonlinearity , 2005, IEEE Transactions on Signal Processing.

[52]  H. Mendelson,et al.  Market Microstructure and Securities Values: Evidence from the Tel Aviv Stock Exchange , 1996 .

[53]  Chien-ting Lin.  Misspecification of capital asset pricing model (CAPM): Implication for size and book-to-market effects , 1999 .

[54]  Y. Amihud,et al.  Dealership market: Market-making with inventory , 1980 .

[55]  Andrew C. Worthington,et al.  Socioeconomic And Demographic Determinants Of Household Gambling In Australia , 2003 .

[56]  The estimation of implied volatility from the Black-Scholes model: some new formulas and their applications , 2003 .

[57]  Radhika Lahiri,et al.  Tax Distortions in a Neoclassical Monetary Economy in the Presence of Administration Costs : Discussion Paper No 151 , 2003 .

[58]  Haim Mendelson,et al.  Liquidity and Asset Prices: Financial Management Implications , 1988 .

[59]  Abbas Valadkhani,et al.  Quantifying the Effect of the Gst on Inflation in Australia's Capital Cities: An Intervention Analysis , 2004 .

[60]  Allan P. Layton,et al.  DURATION DEPENDENCE IN THE US BUSINESS CYCLE , 2003 .

[61]  Shakila Aruman.  The Effectiveness of Foreign Exchange Intervention in Australia: A Factor Model Approach with GARCH Specifications. Discussion Paper No 135 , 2003 .

[62]  Optimal f and Portfolio Return Optimisation in US Futures Markets: Discussion Paper No. 133 , 2003 .

[63]  W. Sharpe,et al.  Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk , 2007 .

[64]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[65]  A. Kyle.  Continuous Auctions and Insider Trading , 1985 .

[66]  Abbas Valadkhani,et al.  An Empirical Analysis of the Black Market Exchange Rate in Iran , 2005 .

[67]  A. Valadkhani.  Does the term structure predict Australia's future output growth? Discussion Paper No. 139, , 2003 .

[68]  Mohammad Alauddin,et al.  Demand for M2 in Developing Countries: An Empirical Panel Investigation: Discussion Paper No. 149 , 2003 .

[69]  Superannuation Funds: The Fees and Performance Debate , 2003 .

[70]  Marc R. Reinganum,et al.  The seasonal behavior of the liquidity premium in asset pricing , 1993 .

[71]  Andrew C. Worthington,et al.  Losing sleep at the market: An empirical note on the daylight saving anomaly in Australia: Discussion Paper No. 146 , 2003 .

[72]  Output and Productivity Comparisons of the Wholesale and Retail Trade Sector: US and Australia, 1991 to 1999: Discussion Paper No. 125 , 2002 .

[73]  Avanidhar Subrahmanyam,et al.  Market microstructure and asset pricing: On the compensation for illiquidity in stock returns , 1996 .

[74]  Marc Robinson.  The Australian Budgeting System: On the Cusp of Change , 2003 .

[75]  A. Marathe,et al.  Liquidity and stock returns in emerging equity markets , 2003 .

[76]  Steven Li.  A valuation model for firms with stochastic earnings , 2003 .

[77]  Haim Mendelson,et al.  Liquidity, Maturity, and the Yields on U.S. Treasury Securities , 1991 .

[78]  A. Worthington,et al.  Business expectations and preferences regarding the introduction of daylight saving in Queensland: Discussion Paper No. 145 , 2004 .

[79]  John A. Anderson.  A Test of Weak-Form Market Efficiency in Australian Bank Bill Futures Calendar Spreads , 2003 .

[80]  Michael E. Drew,et al.  Equity Premium: - Does it exist? Evidence from Germany and United Kingdom , 2004 .

[81]  J. Lintner.  THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS , 1965 .