The Effects of Beta, Bid‐Ask Spread, Residual Risk, and Size on Stock Returns

  • Author(s): YAKOV AMIHUD, HAIM MENDELSON
  • Published: Apr 30, 2012
  • Pages: 479-486
  • DOI: 10.1111/j.1540-6261.1989.tb05067.x

ABSTRACT

Merton's [26] recent extension of the CAPM proposed that asset returns are an increasing function of their beta risk, residual risk, and size and a decreasing function of the public availability of information about them. Associating the latter with asset liquidity and following Amihud and Mendelson's [2] proposition that asset returns increase with their illiquidity (measured by the bid‐ask spread), we jointly estimate the effects of these four factors on stock returns.

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