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.
Hong et al. (Sun,) studied this question.