Size and Liquidity Effects in Japanese Regional Stock Markets

This paper assesses the effectiveness of traded turnover, Amihud (2002) and Liu (2006) metrics in measuring illiquidity, as used in a multifactor CAPM. The performance of this model is contrasted using a unique sample from Japan's regional stock exchanges, namely Sapporo, Nagoya, Fukuoka, Osaka and Tokyo. The evidence suggests that size effects are important in Tokyo, liquidity plays a more important role in the conditional modelling of returns particularly in the smaller markets of Sapporo, Fukuoka and Nagoya where costs of equity are highest.