<p>This study investigates how market liquidity risk is systematically priced in India, focusing on the liquidity beta anomaly. It highlights the limitations of traditional illiquidity pricing models and incorporates behavioral theories linking liquidity risk to stock return sensitivity. Using a 16-year panel comprising 47,808 firm-month observations, the analysis compares the impact of two crises—the Global Financial Crisis and the COVID-19 pandemic—on liquidity risk. By constructing quintile portfolios based on liquidity beta, mispricing signals, arbitrage risk, sentiment, and lottery-like preferences, and applying fixed-effects regression, the study confirms the persistence of the low liquidity beta anomaly in India. This anomaly is largely driven by market microstructure factors such as mispricing and arbitrage costs, though its magnitude varies across crises—weakening during the GFC but strengthening during COVID-19, where sentiment was the dominant driver. A U-shaped relationship also emerges, indicating a rising influence of retail investors. These findings have implications for regulators aiming to enhance market efficiency and for investors seeking profitable strategies.</p>