The Role of Liquidity Factors and Illiquidity Risk on Excess Stock Return in Tehran Stock Exchange

Regarding the importance of the relationship between risk and return, the effect of illiquidity risk and liquidity factors such as excess market return, firm size and book to market value ratio on excess stock return are investigated in this research. By using time series method, this investigation was conducted on Iranian companies listed in Tehran stock exchange monthly over the period 1378-1384. Portfolio construction approach is applied for the reduction of correlation coefficient among these variables. The results show that all of the applied independent variables have significant effect on the dependent variable. Namely, the impact of illiquidity and firm size on excess stock return is negative; however the effect of excess market return and book to market value ratio on excess stock return is positive