Asset returns and liquidity effects: Evidence from a developed but small market

This study investigates an important question in the literature of whether there is a return premium for stocks with low liquidity and high liquidity risk. Using a sample of listed stocks in New Zealand from January 1996 to June 2011, we find that there is a significant illiquidity discount and that liquidity risk does not seem to be a priced factor. These results are robust to the presence of commonly known firm characteristics and risk factors.

► Our sample includes all New Zealand stocks listed from January 1996 to June 2011.
► We test the existence of an illiquidity premium and a liquidity risk premium.
► Inconsistent with extant literature, we find an illiquidity discount.
► We also find no return premium for stocks with higher liquidity risk.