Small Firm Effect, Liquidity and Security Returns: Australian Evidence

Michael E. Drew, Alastair Marsden, Madhu Veeraraghavan

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)135-149
Number of pages15
JournalJournal of Emerging Market Finance
Volume5
Issue number2
DOIs
Publication statusPublished - 2006

Keywords

  • asset pricing
  • closing bid-ask spread
  • JEL Classification: G120
  • JEL Classification: G150
  • Liquidity
  • turnover

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