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Asset Class Liquidity Risk

Author

Listed:
  • Ronnie Sadka

    (Boston College, Carroll School of Management)

Abstract

This paper studies liquidity risk, as measured by the covariation of returns with unexpected changes in aggregate liquidity, across 106 indices covering global equity, industry sectors, fixed income, and hedge funds. Roughly 20% of all sample indices, and over 50% of hedge-fund indices, display a significant exposure to liquidity risk. The annualized cross-sectional liquidity risk premium is estimated at about 2%. The results are robust to various controls and methodological choices. Practical implications for risk management and asset allocation are discussed. Investors with relatively short investment horizons may find it useful to hedge liquidity risk by acquiring low-liquidity-beta assets, while long-run investors may consider increasing liquidity-risk exposures to earn the associated risk premium.

Suggested Citation

  • Ronnie Sadka, 2014. "Asset Class Liquidity Risk," Bankers, Markets & Investors, ESKA Publishing, issue 128, pages 20-30, January-F.
    • Handle: RePEc:rbq:journl:i:128:p:20-30
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    File URL: http://www.revue-banque.fr/medias/content/users/christine/1389193382625.pdf
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    Citations

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    Cited by:

    1. Madalina-Gabriela ANGHEL & Daniel DUMITRESCU, 2016. "Model for analyzing the liquidity risk," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 64(6), pages 68-70, june.
    2. de Jong, F.C.J.M. & Driessen, J.J.A.G., 2015. "Can large long-term investors capture illiquidity premiums," Other publications TiSEM 9c92b978-0099-44d3-9aab-8, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Global Equity; Fixed Income; Hedge Funds; Liquidity Risk; Asset Allocation; Risk Management;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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