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

13 NTU Management Review Vol. 29 No. 1 Apr. 2019 IML c,t = α IMLc + β1 c * GMR t + β2 c * GSMB t + β3 c * GHML t + β4 c * RMR c,t + β5 c * RSMB c,t + β6 c * RHML c,t + e c,t . (1) IML c,t is the illiquidity premium, defined as the return difference between the high- and low- ILLIQ portfolios (averaged across standard deviation groups), for country c in month t . GMR t , GSMB t , and GHML t are the returns on the global market, size and value factors, and RMR c,t , RSMB c,t , and RHML c,t are the return on the regional market, size and value factors, respectively. 6 The intercept in equation (1), α IMLc , measures the risk-adjusted return premium of illiquidity. 3.1.2 Illiquidity Premium Based on Illiquidity Sorted Portfolios Returns For each market, we estimate the illiquidity premium, IML c , and risk-adjusted illiquidity premium, α IML,c , and report the average illiquidity premium for all markets, and sub-groups of emerging, developed, and Asia-Pacific countries. As shown in Table 2, we find substantial international evidence of a significant premium for stock illiquidity. When stocks within each country are return-weighted, the global average monthly IML c is a large 0.72% ( t = 6.69). The median IML c is about the same at 0.81%, suggesting that the mean values are not affected by outliers. The illiquidity premium is also not explained by the portfolio exposure to global and regional common factors. The global average risk- adjusted illiquidity premium α IML,c is also economically significant at 0.85% per month ( t = 7.53). Across the 45 markets, a large percentage (89%) of the markets have positive α IML,c . We can soundly reject the possibility that the positive illiquidity premium we observe in the global stock market is due to chance with p -value which is below 0.001. Hence, there is significant evidence that investors care about stock market illiquidity and require compensation for investing in illiquid securities. We also report the average illiquidity premium within emerging and developed markets. Table 2 reveals that IML c and α IML,c are significantly positive for both emerging and developed markets, with larger premium for illiquidity in emerging markets. For example, the return-weighted α IML,c is a 0.66% per month ( t = 4.16) in developed markets and increases to 1.11% per month ( t = 7.97) in emerging markets. The differences in the median values of α IML,c is more striking, with 0.37% for developed markets and 1.18% for 6 The regional factors have a subscript of c as different markets belong to different regions.