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The pricing of liquidity factors

Sanghyun Hong & Kee H. Chung

Journal of Financial Research2026https://doi.org/10.1111/jfir.70055article
AJG 3ABDC A
Weight
0.50

Abstract

We examine whether liquidity factors add priced information beyond the Fama–French factors, especially size (SMB). Using U.S. equities from 1963–2023, we construct six liquidity factors tied to liquidity costs and liquidity‐risk exposures. Three factors—liquidity costs (LIQ), liquidity commonality (COM), and liquidity sensitivity to market uncertainty (LMU)—capture distinct, economically meaningful liquidity risk. Although highly correlated with SMB, these factors improve spanning and performance tests and leave significant residual pricing information relative to standard models. Liquidity therefore complements the Fama–French framework and highlights additional channels through which trading frictions and uncertainty shape expected returns.

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https://doi.org/https://doi.org/10.1111/jfir.70055

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@article{sanghyun2026,
  title        = {{The pricing of liquidity factors}},
  author       = {Sanghyun Hong & Kee H. Chung},
  journal      = {Journal of Financial Research},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1111/jfir.70055},
}

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The pricing of liquidity factors

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Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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