Liquidity risk and stock returns around the world

► Investors are compensated for bearing liquidity risk in 11 developed countries. ► The global liquidity risk is significantly priced across country market portfolios. ► The improvement of country corporate governance lowers liquidity risk premium. ► The restrictions of insider trading reduce liquidity risk premium. The recent global financial crisis demonstrates that market liquidity is a prominent systematic risk globally. We find that local liquidity risk, in addition to the local market, value and size factors, demands a systematic premium across stocks in 11 developed markets. This local pricing premium is smaller in countries where the country-level corporate boards are more effective and where there are less insider trading activities. We also discover that global liquidity risk is a significant pricing factor across all developed country market portfolios after controlling for global market, value, and size factors. The contribution of this risk to the return on a country market portfolio is economically and statistically significant within and across regions.