Revisiting Pastor–Stambaugh liquidity factor

The objective of this study is to examine the Pastor and Stambaugh (2003) liquidity-augmented four-factor asset pricing model to revisit whether the liquidity factor is indeed priced in the U.S. equity market, over the period from January 1966 through December 1999. The study applies the state-of-the-art two-pass cross-sectional regression methodology of Lewellen et al. (2010). I find the liquidity factor is not priced. The result is robust using an extended sample that ends in December 2016. •The Pastor–Stambaugh liquidity-augmented four-factor asset pricing model is examined.•A state-of-the-art two-pass cross-sectional regression methodology is employed.•The liquidity factor is not priced in the U.S. equity market.