Research-Thesis: Liquidity and the cross-section of stock returns in Sweden after transaction cost.

Abstract

The study looks at whether there exists a liquidity premium in the Swedish stock market once we account for transaction costs. The study applies Swedish stock data from January 1987 to December 2023 to construct the following liquidity variables: Amihud illiquidity, inverse turnover, and zero-return days. Liquidity portfolios will be constructed by ranking stocks based on liquidity, creating high-minus-low liquidity strategies. Gross returns, net returns, adjusted alphas, and Fama-MacBeth regressions will be used in evaluating these strategies. In measuring the transaction costs of each strategy, we shall apply Corwin-Schultz spreads and portfolio turnover in the long and short legs. The findings indicate little support for a liquidity premium, albeit mainly among equally weighted portfolios. All the high-minus-low portfolios result in negative average net returns after transaction costs are taken into consideration.