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Liquidity risk in stock returns: An event-study perspective

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  • Cao, Charles
  • Petrasek, Lubomir

Abstract

We examine in an event-study context what factors affect the relative performance of stocks during liquidity crises. We find that market risk, measured by the market beta, is not a good measure of expected abnormal stock returns on days with liquidity crises. Instead, abnormal stock returns during liquidity crises are strongly negatively related to liquidity risk, measured by the co-movement of stock returns with market liquidity. The degree of informational asymmetry and the ownership structure of the firm also help to explain abnormal stock returns on crisis days. Our findings have important implications for managing the liquidity risk of equity portfolios.

Suggested Citation

  • Cao, Charles & Petrasek, Lubomir, 2014. "Liquidity risk in stock returns: An event-study perspective," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 72-83.
    • Handle: RePEc:eee:jbfina:v:45:y:2014:i:c:p:72-83
    DOI: 10.1016/j.jbankfin.2013.09.020
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    More about this item

    Keywords

    Financial crises; Liquidity risk; Asymmetric information; Institutional investors;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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