In this research article, we present a liquidity premium based asset pricing model and test it in the Indian stock market. Using high-frequency data of stocks listed in the National Stock Exchange, we show that observed illiquidity has a significant negative impact on realized stock returns even after controlling for the up and down market, volatility, and effects of derivatives trading. The illiquidity measure is modified for its time variations, and then the modified measure is used to assess

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... its impact on returns. Using a cross-section of stocks, we show the year wise results of the model and extend it to show that it has some role in explaining returns across industries. Findings show that the down market has contemporaneous systematic risk at higher levels, and the market risk premium is higher in down markets. Finance, utility and real estate sector companies have higher systematic risk in both up and down market and investors of these sectors has relatively higher expected higher returns in comparison to companies from the rest of the segments.