This paper examines the relationship between stock illiquidity and stock returns, both across stocks and over time. The author introduces a new measure of illiquidity, ILLIQ, which is the average daily ratio of absolute stock return to dollar volume. This measure is derived from readily available daily stock data and allows for the construction of long-term time series. The study finds that expected market illiquidity positively affects ex ante stock excess returns, supporting the hypothesis that stock returns are influenced by expected illiquidity. This suggests the existence of an illiquidity premium and helps explain the equity premium puzzle. The impact of market illiquidity is stronger for small firms' stocks, providing an explanation for the changes in the "small firm effect" over time. The paper also tests the effects of expected and unexpected illiquidity on stock returns, finding that unexpected illiquidity lowers contemporaneous stock prices. These findings are consistent with higher realized illiquidity raising expected illiquidity, which in turn increases stock expected returns and lowers stock prices. The study concludes that stock liquidity, measured by ILLIQ and turnover, significantly affects stock returns, with small firms being more affected by changes in market illiquidity.This paper examines the relationship between stock illiquidity and stock returns, both across stocks and over time. The author introduces a new measure of illiquidity, ILLIQ, which is the average daily ratio of absolute stock return to dollar volume. This measure is derived from readily available daily stock data and allows for the construction of long-term time series. The study finds that expected market illiquidity positively affects ex ante stock excess returns, supporting the hypothesis that stock returns are influenced by expected illiquidity. This suggests the existence of an illiquidity premium and helps explain the equity premium puzzle. The impact of market illiquidity is stronger for small firms' stocks, providing an explanation for the changes in the "small firm effect" over time. The paper also tests the effects of expected and unexpected illiquidity on stock returns, finding that unexpected illiquidity lowers contemporaneous stock prices. These findings are consistent with higher realized illiquidity raising expected illiquidity, which in turn increases stock expected returns and lowers stock prices. The study concludes that stock liquidity, measured by ILLIQ and turnover, significantly affects stock returns, with small firms being more affected by changes in market illiquidity.