Liquidity Risk and Asset Pricing: Evidence from Amman Stock Exchange

Mohammad Ahmad BaniHani, Mona Mamdouh AlMwalla

Abstract


The main aim of this study is to investigate the effect of liquidity risk on the explanatory power of the original model that was introduced by Fama and French three-factor model, using the turnover ratio measurement as liquidity proxies. Using monthly data for the period from January 2007 to December 2013 for a sample of 56 listed companies in Amman Stock Exchange (ASE). The study shows the existence of size, value and liquidity effects. The liquidity factor, although improves the explanatory power of the original model, and is significant in the most portfolios, when applied in the Jordanian Financial Market. The study also shows that adding liquidity factor can improve explanatory power of the CAPM, and the Fama and French three-factor model. The study advices investors and portfolio managers to use the liquidity Four-factor model, because this model provides better explanation to the variation in the portfolios return.

Keywords


Asset Pricing Model, Liquidity Effect, Size Effect, and Value Effect, Turnover Rate, and CAPM.

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