Premium
Is liquidity the missing link?
Author(s) -
Limkriangkrai Manapon,
Durand Robert B.,
Watson Iain
Publication year - 2008
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2008.00260.x
Subject(s) - market liquidity , capital asset pricing model , economics , financial economics , market integration , link (geometry) , market segmentation , econometrics , business , monetary economics , macroeconomics , computer science , microeconomics , computer network
Durand et al. (2006a) argue that the Australian market is both internationally integrated and domestically segmented. They find that the US‐based three‐factor model captures returns of the largest stocks in Australia (evidence of international integration), but that it is unable to account for the returns of the smallest stocks (evidence of domestic segmentation). This study resolves the puzzle left by Durand et al . (2006a). Incorporating a liquidity factor provides the missing link in their analysis: it results in a model that permits both the international integration of the largest stocks and the model can account for the returns of the smallest stocks. Our analysis highlights the important role of liquidity in Australian asset pricing.