Liquidity and Asset Pricing in Indonesia Stock Exchange

Traditionally, stock valuation is often linked only with risk factor, namely the higher the risks are, the bigger investors expect the return of rate will be. This is also become the basis in the model of Capital Asset Pricing Model (CAPM) which only utilizes one factor (risk) in predicting the stock price. In reality, there are other factors that need to be considered by investors, which is stock liquidity. The ability to conduct transaction quickly is only for liquid stock, so that investors will ask for additional compensation for illiquidity (cost of illiquidity). This study will only examine the effect of liquidity and its effect on stock returns in Indonesia stock exchange. The objective is to search for a more accurate model in assessing stocks by comparing Capital Asset Pricing Model and Liu's Two Factor Model. It is expected that by conducting this testing, it can be known whether the addition variable of liquidity will increase the level of influence to the stock price. The samples used are stocks that are included in manufacture sector in the period of 2012-2014. The result of this study shows that the variable of market returns still affects the stock return, but it does not apply to liquidity variable which does not give partial effect. Simultaneously, the addition of liquidity variable will increase the effect of independent variables to dependent variables.