Economic policy uncertainty and illiquidity return premium

Hui Ching Hsieh, Van Quoc Thinh Nguyen

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

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.

Original languageEnglish
Article number101291
JournalNorth American Journal of Economics and Finance
Volume55
DOIs
Publication statusPublished - 2021 Jan

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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