Ibbottson's recent addition of liquidity premium as a measure of required
rates of return has generated some interesting discussions. In particular, the
reversal of size premium for very liquid stocks has some researchers perplexed.
This paper presents empirical evidence suggesting that liquidity is an important
pricing factor, even after the size premium has been taken into account.
Addition of a size premium to the required rate of return does not preclude use
of a discount for lack of marketability/liquidity. The two factors are
supplements and not substitutes.
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