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Liquidity components: Commonality in liquidity, underreaction, and equity returns

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  • Ince, Baris

Abstract

I decompose firm-specific monthly-varying illiquidity into three components: (i) alpha, (ii) systematic, and (iii) idiosyncratic. Investors demand a premium to hold stocks with high systematic illiquidity. However, the systematic illiquidity premium disappears when very small stocks are excluded. On the other hand, investors tend to underreact to idiosyncratic (il)liquidity. Hence, stocks with high (low) idiosyncratic liquidity generate positive (negative) future risk-adjusted returns. More specifically, stocks in the highest idiosyncratic liquidity quintile generate 7% more annualized risk-adjusted return compared to stocks in the lowest idiosyncratic liquidity quintile.

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  • Ince, Baris, 2022. "Liquidity components: Commonality in liquidity, underreaction, and equity returns," Journal of Financial Markets, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finmar:v:60:y:2022:i:c:s1386418122000234
    DOI: 10.1016/j.finmar.2022.100730
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    More about this item

    Keywords

    Illiquidity; Idiosyncratic liquidity; Commonality in liquidity; Underreaction; Cross-section of returns;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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