The search for value often draws investors into illiquid markets, and to some, this can be a daunting prospect. However, research suggests that illiquid stocks outperform their liquid counterparts over the long-term.
Illiquidity-anomaly
In what has been called an illiquidity-anomaly, several studies published over the past few decades have shown that the market rewards illiquid stocks, although it's unclear exactly why. One of the earliest studies on the topic was conducted by researchers Amihud and Mendelson who used bid–ask spreads to explain stock returns between 1961 and 1980. Published in 1986, ‘Asset Pricing And The Bid-Ask Spread’ raised some interesting points.
The data showed that average portfolio risk-adjusted returns increased with wider bid-ask spreads. Moreover, the data lead to a conclusion that...
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