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

Merton's recent extension of the capital asset pricing model 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 Yokov Amihud and Haim Mendelson's proposition that asset returns increase with their illiquidity (measured by the bid-ask spread), the authors jointly estimate the effects of these four factors on stock returns. Copyright 1989 by American Finance Association.