In this thesis, I investigate the effect of liquidity risk on stock returns using data from the London Stock Exchange. The main motivation behind this research is that most previous studies on this topic focus on the US stock market and very little is known about the link between liquidity and stock returns in the UK. Also, most studies only focus on one dimension of liquidity and ignore other illiquidity measures that capture different dimensions. This study employs eight different proxies of

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... iquidity, namely bid-ask spread, effective spread, quoted spread, Liu's (2006) measure, dollar trading volume, turnover ratio, Amihud's (2002) RtoV ratio and Florackis et al.'s (2011) RtoTR ratio. Interestingly, the results based on the LSE do not support the existence of an illiquidity premium. In contrast, the results suggest a negative relationship between illiquidity and stock returns. As illiquidity increases, instead of seeing rises in stock returns, post-ranking returns decrease. This finding contradicts previous US evidence, which shows a positive relationship between illiquidity and stock returns.