Illiquidity and Factor Returns:
Exploring the Intersection Between Illiquidity/Small Cap and Popular Factors
Factor returns are often reported as the average of factor returns among large stocks and the factor returns among small stocks. However, factor returns among small, illiquid stocks are significantly higher than those among larger, more liquid stocks, suggesting that the factor returns in the literature are exaggerated and cannot be implemented with substantial assets. Moreover, investors who are able to take greater liquidity risk can capture higher factor returns by investing in factors among small stocks.
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