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In this article we examine whether the traditional characteristic liquidity premium can be explained by market liquidity risk. We find that after adjusting for Pastor and Stambaugh market liquidity factor, the level of traditional liquidity remains priced. Also, consistent with previous studies on market liquidity and asset pricing, we do not find stock characteristics or Fama-French factors to determine the impacts of liquidity level on stock return. More interestingly, we document that the well-known size-return relationship might simply be a proxy for the liquidity-return relationship. Our results are consistent in both time-series and cross-sectional frameworks as well as robust in both New York Stock Exchange-American Stock Exchange (NYSE-AMEX) and National Association of Securities Dealers Automated Quotations (NASDAQ) exchanges.
