Illiquidity and Stock Returns: A Revisit

This paper explains and extends my 2002 paper. It presents a return factor of illiquid-minus-liquid stocks (IML), which provides a time-series of the illiquidity premium. The risk-adjusted expected return on IML is positive and significant in the last 63 years and while it is lower in the period that follows my 2002 paper it remains positive and significant. IML also has the predicted response to market illiquidity shocks. In particular, the relation between illiquidity shocks and stock returns is more negative for illiquid stocks even after my study period.