Time-Varying Liquidity Risk and the Cross Section of Stock Returns
AbstractThis paper studies whether stock returns' sensitivities to aggregate liquidity fluctuations and the pricing of liquidity risk vary over time. We find that liquidity betas vary across two distinct states: one with high liquidity betas and the other with low betas. The high liquidity-beta state is short lived and characterized by heavy trade, high volatility, and a wide cross-sectional dispersion in liquidity betas. It also delivers a disproportionately large liquidity risk premium, amounting to more than twice the value premium. Our results are consistent with a model of liquidity risk in which investors face uncertainty about their trading counterparties' preferences. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: firstname.lastname@example.org., Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 21 (2008)
Issue (Month): 6 (November)
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- Wang, Jianxin, 2013. "Liquidity commonality among Asian equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1209-1231.
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Open Access publications from Katholieke Universiteit Leuven
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- Hearn, Bruce, 2010. "Time varying size and liquidity effects in South Asian equity markets: A study of blue-chip industry stocks," International Review of Financial Analysis, Elsevier, vol. 19(4), pages 242-257, September.
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