TY - JOUR
T1 - Economic policy uncertainty and illiquidity return premium
AU - Hsieh, Hui Ching
AU - Nguyen, Van Quoc Thinh
N1 - Publisher Copyright:
© 2020 Elsevier Inc.
PY - 2021/1
Y1 - 2021/1
N2 - In this study, we examine the relation between the price of liquidity, or illiquidity return premium, and the economic policy uncertainty (EPU). On average, an illiquid portfolio earns a 0.597% higher monthly return than a liquid portfolio. The results further show that the EPU index has a positive relationship with the illiquidity return premium. This indicates that investors require higher compensation for holding illiquid stocks when there is a higher economic uncertainty. We also show that EPU affects the illiquidity return premium through the market illiquidity channel. The rise of EPU could increase the risk of illiquid stocks and make investors more risk-averse, thereby requiring higher compensation for illiquidity. Finally, it is found that the relationship between EPU and the illiquidity return premium is stronger when market liquidity is impaired and during crises.
AB - In this study, we examine the relation between the price of liquidity, or illiquidity return premium, and the economic policy uncertainty (EPU). On average, an illiquid portfolio earns a 0.597% higher monthly return than a liquid portfolio. The results further show that the EPU index has a positive relationship with the illiquidity return premium. This indicates that investors require higher compensation for holding illiquid stocks when there is a higher economic uncertainty. We also show that EPU affects the illiquidity return premium through the market illiquidity channel. The rise of EPU could increase the risk of illiquid stocks and make investors more risk-averse, thereby requiring higher compensation for illiquidity. Finally, it is found that the relationship between EPU and the illiquidity return premium is stronger when market liquidity is impaired and during crises.
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U2 - 10.1016/j.najef.2020.101291
DO - 10.1016/j.najef.2020.101291
M3 - Article
AN - SCOPUS:85092099465
SN - 1062-9408
VL - 55
JO - North American Journal of Economics and Finance
JF - North American Journal of Economics and Finance
M1 - 101291
ER -