What captures liquidity risk? A comparison of trade and order based liquidity factors
AbstractIs the effect of liquidity risk on asset prices sensitive to our choice of liquidity proxy? In addressing this fundamental question, we achieve two main results. First, when we estimate factor models on a broad range of liquidity measures we uncover a profound distinction between trade and order based liquidity. Second, although the order based factor provides a better signal of available liquidity, we find that only the factor related to information risk explains expected returns both in a theoretical liquidity-CAPM model and in a linear pricing framework. Our results suggest a surprising fragility of liquidity-based asset pricing.
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Bibliographic InfoPaper provided by Norges Bank in its series Working Paper with number 2007/03.
Length: 45 pages
Date of creation: 28 Jun 2007
Date of revision:
CPAM; Liquidity risk; Liquidity factor; Order based measure; Trade based measure; Information risk;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-12 (All new papers)
- NEP-CFN-2008-01-12 (Corporate Finance)
- NEP-MST-2008-01-12 (Market Microstructure)
- NEP-RMG-2008-01-12 (Risk Management)
- NEP-UPT-2008-01-12 (Utility Models & Prospect Theory)
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- Dudek, Jérémy, 2013. "Illiquidité, contagion et risque systémique," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/13236 edited by Le Fol, Gaëlle, September.
- Björn Hagströmer & Richard G. Anderson & Jane M. Binner & Birger Nilsson, 2009.
"Dynamics in systematic liquidity,"
2009-025, Federal Reserve Bank of St. Louis.
- Chollete, Lorán, 2008. "The Propagation of Financial Extremes: An Application to Subprime Market Spillovers," Discussion Papers 2008/2, Department of Business and Management Science, Norwegian School of Economics.
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