| Summary: | This paper examines the role of illiquidity risk factor in asset Pricing through two variants of liquidity-based three-factor models, referred as SiLiq and DiLiq, which are developed in the context of Fama-French model. The sample comprises 230 to 480 firms which stocks are listed on Bursa Malaysia over the period of January 1987 to December 2004. To proxy for liquidity, this study tests six alternative measures based on trading volume variables, namely dollar volume (DVOL), share turnover (TURN), Illiquidity (ILLIQ), and the coefficient of variations of each of these variables (CVDVOL" cVrURN" and cVILLIQ. The preliminary results indicate that the illiquidity risk factors (L M H) that are formed from TURN consistently outperform the other alternatives as they explain as high as 36 percent variations in stock returns. The results of multiple time series regressions lend strong support for the hypothesis that illiquidity risk are priced, particularly when is LMH incorporated in DiLiq.
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