The seasonal behavior of the liquidity premium in asset pricing

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Abstract

This paper empirically investigates the seasonal behavior of the liquidity premium in asset pricing. The evidence suggests a strong seasonal component. In the 1961–1990 period, the liquidity premium is reliably positive only during the month of January. For the non-January months, one cannot detect a positive liquidity premium. The impact of the relative bid-ask spreads on asset pricing in non-January months cannot be reliably distinguished from zero. In contrast to Amihud and Mendelson (1986), however, our evidence suggests that the size effect is significant, even after controlling for spreads.

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We wish to thank Paul Fellows, Narayana Kocherlakota, Paul Schultz, Richard Stevenson, Susan Watts, Bill Schwert (the editor), and Eugene F. Fama (the referee) for their helpful comments and suggestions. We would like to thank Hans Stoll and Robert Whaley for providing us with their spread data. We gratefully acknowledge the secretarial support of

Herring and financial support from the Financial Markets Research Institute at the University of Iowa. Any remaining errors are ours.

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