Liquidity Premium at National Stock Exchange of India

This study endeavours to investigate the existence of liquidity premium at National Stock Exchange of India, with a sample of Nifty 500 stocks for a period ranging from 1st April 2000 to 31st March 2018, by employing four different proxies of liquidity i.e. Trading volume, Turnover rate, Relative Spread and Amihud Illiquidity Ratio. The empirical evidence indicated that as liquidity allied to portfolio reduces, return also expands to recompense investors for bearing liquidity risk validating the existence of a negative relationship between liquidity and expected stock returns at NSE. Among the various asset-pricing models employed in this study, Liquidity augmented Fama and French three-factor model turned out to be the best in explaining cross-sectional variations in portfolio returns of NSE stocks. Strong liquidity premium was observed such that illiquid stocks outperformed liquid stocks which has strong inference for investors and portfolio managers who continuously look for investment strategies that can help them beat the market.