Name of Student

Geronimo Enguito
Mary Cor Sagrado
Michael Jay B. Homol
Title of the Scientific Paper
Is Liquidity Risk Priced? Theory and Evidence
Statement of the Paper’s Research Problem

 What is the significant relationship of liquidity premium and cross-sectional stock

returns?
 In what aspect does the proposed measurement of liquidity premium differs from the
conventional measures as presented in other studies?
 What are the implications of liquidity on investments?
Goals, Purpose, and Significance of the Paper

 The research aims to develop a new model that measures liquidity premium and then be
compared against identified liquidity premium from previous studies.
 It is also concerned on finding out whether liquidity premium and cross-sectional stock
returns have significant relationship with each other.
Framework Used in the Paper
Theoretical: Sites concepts of previous related studies.
Identification of Assumption(s), if applicable

 There is a negative relationship between liquidity premium and cross-sectional stock

returns.
 The proposed liquidity measure differs with conventional measurements.
 Liquid assets are expected to yield a price premium while illiquid assets shall be disposed
at a price discount.
Data Collection Methods and Analysis Used in the Paper
The researchers used descriptive statistics to explain a variable using observational data
collection
Summary of the Results
Based on the performed statistical methods and computation, it was found out that
premium and illiquidity ratio differs in significantly from one firm to the other and liquidity
premium is distinct and identifiable irrespective of the parameter values of the relative risk
aversion. It was also proven that the proposed liquidity premium and Amihud’s illiquidity yield a
negative relationship hence, for more liquid stocks a higher the liquidity premium is expected
and vise-versa. Also, the researcher’s findings were consistent with Amihud’s finding that,
illiquidity is positively related to the cross-sectional stock returns. Furthermore, LIQ and stock
returns were noted to have an inverse relationship. In order to compensate a stock’s failure to
provide higher premium investors require higher stock return. To sum up, the proposed liquidity
premium as calculated based on the models generated from the study supports and can be used as
an alternative of the previous study’s illiquidity ratio.
Three (3) Major Points of Agreement

 Liquidity premium (discount) does not depend on the often-limited transactional

characteristics of an asset.
 LIQ and stock returns are negatively and significantly related.
 Illiquidity is positively related to the cross-sectional stock returns.
Three (3) Major Points of Disagreement

 The liquidity factor based on LIQ is priced in the asset pricing test and captures the
liquidity risk.
 The liquidity premium does not depend on the transactional characteristics of the market.
 Investor can extend the investment horizon effectively by increasing the probability of
the investment position, maintaining a positive balance until it reaches the targeted return.
Conclusions

The research have found out that liquidity premium is highly comparable to the existing
measures in literature. Hence, the liquidity premium derived from the research is highly
considered as a close substitute to the conventional approach of liquidity measurement.
Furthermore, it was further concluded that there is a negative relationship between the liquidity
premium and cross-sectional stock returns and also a negative relationship between the risk
factor based on liquidity premium and the expected excess returns on portfolios sorted on the
liquidity premium in the time series. Therefore, it clearly manifest that the risk imbedded in the
developed liquidity premium measure is priced in stock and portfolio returns and directly
substantiate the claims of previous studies.