The Effects of Beta, Bid-Ask Spread, Residual Risk, and Size on Stock Returns

Authors

  • YAKOV AMIHUD,

  • HAIM MENDELSON

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    • Amihud is with the Faculty of Management, Tel Aviv University and the Graduate School of Business, New York University; Mendelson is with the William E. Simon Graduate School of Business Administration, University of Rochester. We thank Robert Merton for helpful comments and suggestions.


ABSTRACT

Merton's [26] recent extension of the CAPM proposed that asset returns are an increasing function of their beta risk, residual risk, and size and a decreasing function of the public availability of information about them. Associating the latter with asset liquidity and following Amihud and Mendelson's [2] proposition that asset returns increase with their illiquidity (measured by the bid-ask spread), we jointly estimate the effects of these four factors on stock returns.

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