Reassessing the Illiquidity-Return Relationship: Evidence from Germany, the UK, and the U.S.

Thomas Paul; Abdullah Aryoubi; Thomas Walther

doi:10.1016/j.irfa.2025.104469

Reassessing the Illiquidity-Return Relationship: Evidence from Germany, the UK, and the U.S.

Thomas Paul^*, Abdullah Aryoubi^*, Thomas Walther^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

We investigate the relationship between market illiquidity and excess returns in the stock markets of Germany, the UK, and the U.S. from 1999 to 2022. Despite the growing criticism of this relationship, we show that illiquidity still is a significant factor, especially when we distinguish between stable and crisis periods. Unexpected illiquidity is negatively related to returns in all periods, while the effect of expected illiquidity differs over time. Our results are robust to various variations of Amihud's illiquidity measure.

Original language	English
Article number	104469
Number of pages	16
Journal	International Review of Financial Analysis
Volume	106
DOIs	https://doi.org/10.1016/j.irfa.2025.104469
Publication status	Published - Oct 2025

Bibliographical note

Publisher Copyright:
© 2025 The Author(s)

Keywords

Asset pricing
Excess return
Financial turmoil
Illiquidity
Portfolio management
Structural breaks

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Reassessing the Illiquidity-Return Relationship: Evidence from Germany, the UK, and the U.S.Final published version, 2.56 MBLicence: CC BY

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title = "Reassessing the Illiquidity-Return Relationship: Evidence from Germany, the UK, and the U.S.",

abstract = "We investigate the relationship between market illiquidity and excess returns in the stock markets of Germany, the UK, and the U.S. from 1999 to 2022. Despite the growing criticism of this relationship, we show that illiquidity still is a significant factor, especially when we distinguish between stable and crisis periods. Unexpected illiquidity is negatively related to returns in all periods, while the effect of expected illiquidity differs over time. Our results are robust to various variations of Amihud's illiquidity measure.",

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N2 - We investigate the relationship between market illiquidity and excess returns in the stock markets of Germany, the UK, and the U.S. from 1999 to 2022. Despite the growing criticism of this relationship, we show that illiquidity still is a significant factor, especially when we distinguish between stable and crisis periods. Unexpected illiquidity is negatively related to returns in all periods, while the effect of expected illiquidity differs over time. Our results are robust to various variations of Amihud's illiquidity measure.

AB - We investigate the relationship between market illiquidity and excess returns in the stock markets of Germany, the UK, and the U.S. from 1999 to 2022. Despite the growing criticism of this relationship, we show that illiquidity still is a significant factor, especially when we distinguish between stable and crisis periods. Unexpected illiquidity is negatively related to returns in all periods, while the effect of expected illiquidity differs over time. Our results are robust to various variations of Amihud's illiquidity measure.

KW - Asset pricing

KW - Excess return

KW - Financial turmoil

KW - Illiquidity

KW - Portfolio management

KW - Structural breaks

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Reassessing the Illiquidity-Return Relationship: Evidence from Germany, the UK, and the U.S.

Abstract

Bibliographical note

Keywords

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