Although generally considered safe assets, liquid stocks underperformed illiquid
stocks during the financial crisis of 2008–2009. The performance of
stocks during the crisis can be better explained by their historical liquidity
betas (risk) than by their historical liquidity levels. Stocks with different
historical liquidity levels did not experience different returns after
controlling for liquidity risk. The authors’ findings highlight the
importance of accounting for both liquidity level and liquidity risk in risk
management applications.