Asia-Pacific Journal of Business (아태비즈니스연구)

KNU The Institute of Management & Economy Research (강원대학교 경영경제연구소)
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Long-term Trend of Liquidity Premium in the Korean Stock Market

국내 주식시장에서 유동성 프리미엄의 장기적 변화에 대한 연구

  • Received : 2019.05.30
  • Accepted : 2019.06.18
  • Published : 2019.06.30
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Abstract

Following the methodology of Ben-Rephael, Kadan and Wohl (2015), this paper examines whether firm-level liquidity premium exists and whether the premium exhibits a long-term trend in the Korean stock market. The results show that over the whole sample period (1998-2018), a liquidity premium of 0.083% exists in the cross-section of stocks. Interestingly, the pricing of liquidity declines significantly over the sample period. Sub-period analysis indicates that liquidity is priced mainly in the first sub-period (1998-2004) with a significant monthly premium of 0.304%, while the pricing of liquidity becomes weaker or insignificant in the second (2005-2011) and the third (2012-2018) period. I also find that the significance of the liquidity premium in the first period is attributed to small stocks. To explore underlying reasons that might affect the decline in the liquidity premium, I decompose liquidity premium into the product of firm-level liquidity and the sensitivity of expected stock returns on liquidity. The results reveal that the long-term decline is explained by both an increase in firm-level liquidity and a decrease in the sensitivity of expected returns on liquidity.

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References

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