Journal of Investment Strategies

Risk.net

What drives the January seasonality in the illiquidity premium? Evidence from international stock markets

Adam Zaremba and Nusret Cakici

  • We comprehensively examine and explain the seasonal effect in the illiquidity premium.
  • We use data from 23 major international stock markets for the years 1991 to 2019.
  • We demonstrate a strong and pervasive January effect in illiquidity premium.
  • The seasonal pattern is driven and thoroughly explained by a parallel phenomenon in small firms.

This study is, to the best of the authors’ knowledge, the first attempt to comprehensively examine and explain the January effect in the illiquidity premium. Using data from 23 major international stock markets for the years 1991–2019, we demonstrate a strong and pervasive calendar seasonality in liquidity pricing across different geographical regions. The entire illiquidity premium is realized almost solely in January. Further, we show that this seasonal pattern is driven by a parallel phenomenon in small firms; exposure to the size factor thoroughly explains the January seasonality in the illiquidity premium.

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