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The Liquidity and Stock Returns: Empirical Evidence in Thailand

Prior studies establish liquidity as an important consideration in investment decisions. This study examines the existence of the liquidity effects on the nonfinancial common stocks in Stock Exchange of Thailand (SET). Researcher utilizes Fama and French (1993) three-factor model, earning-to-price factor, and Amihud (2002) liquidity proxy to investigate whether the liquidity is priced in Thai stocks or not. This study finds that normal three-factor model works well with large liquid stocks. However, the differences between illiquid and liquid portfolios decrease after adding a liquidity factor to the three-factor model. In the other words, it implies prominence of including a liquidity factor in asset pricing model for SET. The results show that the liquidity-augmented model significantly improves the explanation power on the excess expected stock returns over the three-factor model. Therefore, it suggests that the liquidity-augmented model is a more appropriate choice in explaining Thai stocks returns.