Liquidity, Liquidity Risk and Stock Returns: Evidence from Japan


  • We would like to thank the editor John Doukas and an anonymous referee for their helpful comments and suggestions. Qian Sun and Bo Li gratefully acknowledge the research grant support from the National Natural Science Foundation of China (No. 70872095) and from the Ministry of Education (No. 08JJD630012). Changyun Wang gratefully acknowledges the financial support from the National Social Science Foundation of China (No.:11AZD094). All errors remain ours. Correspondence: Qian Sun.


This paper investigates-whether liquidity and liquidity risk are priced in Japan. Using modified Amihud illiquidity measures, we find both cross-sectional and time series evidence that liquidity is priced in the Japanese stock market during the period 1975–2006. The evidence is largely consistent with Amihud's (2002) findings in the US market. We further employ the liquidity-adjusted CAPM proposed by Acharya and Pedersen (2005) to examine whether liquidity risk is priced in Japan. Consistent with Acharya and Pedersen's findings in the US, we show that liquidity risk is priced in the stock market, in addition to the liquidity level. These findings strengthen the confidence that liquidity is a determinant of stock returns.