臺大管理論叢 NTU Management Review VOL.29 NO.1

The Illiquidity Premium: Further Evidence from Global and Asia-Pacific Markets 12 independently divided into three portfolios based on the breakpoints of the 30 th and 70 th percentiles of book-to-market ratio for all stocks with positive book value of equity, where the book value is for the end of the previous fiscal year whereas the market value is for the end of the previous calendar year. The country’s size factor (SMB) is the difference of the value-weighted average returns between the small firm portfolio and the big firm portfolio, and the value factor (HML) is the difference between the value-weighted average returns of the two extreme BE/ME portfolios across the two size portfolios. All returns are in US dollar terms. We use the respective market’s stock market capitalization in US dollars at the end of the previous month as the weight to aggregate the market level factor returns in order to construct the global risk factors. To construct the regional market, size and value factors, we first group the 45 markets into three regions based on their geographical location: Asia-Pacific, America and Europe. Then each region is further divided into developed and emerging markets based on their economic development status measured by the per capita gross national income from the World Bank. 5 The regional market factor is the value-weighted average of each market’s value-weighted market return in excess of the one-month US Treasury bill rate. The regional SMB and HML factors are constructed in two steps to control for the high correlation between the regional and corresponding global factors. First, we construct the value-weighted average of the country specific factor returns in each region. Second, we orthogonalize these regional factors against their respective global factors by using the residuals plus the intercept from a regression of the regional factor on the corresponding global factor. Finally, we estimate the following regression to obtain the risk-adjusted illiquidity premium, α IML,c : 5 Markets are sub-divided into six regions as follows: (i) Asia-Pacific-developed markets (Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea, and Taiwan); (ii) Asia-Pacific-emerging markets (Bangladesh, China, India, Indonesia, Malaysia, Pakistan, Philippines, Romania, Sri Lanka, and Thailand); (iii) America-developed markets (Canada and US); (iv) America-emerging markets (Argentina, Brazil, Chile, Mexico and Peru); (v) Europe-developed markets (Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Israel, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and UK); and (vi) Europe-emerging markets (Egypt, Poland, South Africa, and Turkey).