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Liquidity risk and stock returns around the world

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  • Liang, Samuel Xin
  • Wei, John K.C.
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    Abstract

    The recent global financial crisis demonstrates that market liquidity is a prominent systematic risk globally. We find that local liquidity risk, in addition to the local market, value and size factors, demands a systematic premium across stocks in 11 developed markets. This local pricing premium is smaller in countries where the country-level corporate boards are more effective and where there are less insider trading activities. We also discover that global liquidity risk is a significant pricing factor across all developed country market portfolios after controlling for global market, value, and size factors. The contribution of this risk to the return on a country market portfolio is economically and statistically significant within and across regions.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 12 ()
    Pages: 3274-3288

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3274-3288

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Liquidity risk; Risk premium; International markets;

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    Cited by:
    1. Papavassiliou, Vassilios G., 2013. "A new method for estimating liquidity risk: Insights from a liquidity-adjusted CAPM framework," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 184-197.
    2. Dutt, Tanuj & Humphery-Jenner, Mark, 2013. "Stock return volatility, operating performance and stock returns: International evidence on drivers of the ‘low volatility’ anomaly," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 999-1017.
    3. Hahn, TeWhan & Ligon, James A. & Rhodes, Heather, 2013. "Liquidity and initial public offering underpricing," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4973-4988.

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