Asset Pricing And Systematic Liquidity Risk: An Empirical Investigation Of The Spanish Stock Market
AbstractIt seems reasonable to expect systematic liquidity shocks to affect the optimal behavior of agents in financial markets. Indeed, fluctuations in various measures of liquidity are significantly correlated across common stocks(Chordia, Roll and Subrahmanyam (2000)). Thus, this paper empirically analyzes whether Spanish expected returns during the nineties are associated cross-sectionally to betas estimated relative to two competing liquidity risk factors. On one hand, we propose a new market-wide liquidity factor which is defined as the difference between returns of stocks highly sensitive to changes in the relative bid-ask spread less returns from stocks with low sensitivities to those changes. We argue that stocks with positive covariability between returns and this factor are assets whose returns tend to go down when aggregate liquidity is low, and hence do not hedge a potential liquidity crisis. Consequently, investors will require a premium to hold these assets. Similarly, note that in the case of assets that covary negatively with the liquidity factor, investors may be willing to pay a premium rather than to require an additional compensation. On the other hand, Pastor and Stambaugh (2002) suggest that a reasonable liquidity risk factor should be associated with the strength of volume-related return reversals since order flow induces greater return reversals when liquidity is lower. Our empirical results show that neither of these proxies for systematic liquidity risk carries a premium in the Spanish stock market.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb026022.
Date of creation: Jan 2002
Date of revision:
Other versions of this item:
- Rubio Irigoyen, Gonzalo & Martínez Sedano, Miguel Angel & Nieto, Belén, 2003. "Asset pricing and systematic liquidity risk: an empirical investigation of the Spanish stock market," DFAEII Working Papers 2002-05, University of the Basque Country - Department of Foundations of Economic Analysis II.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-03 (All new papers)
- NEP-FIN-2003-03-03 (Finance)
- NEP-FMK-2003-03-03 (Financial Markets)
- NEP-MAC-2003-03-03 (Macroeconomics)
- NEP-RMG-2003-03-03 (Risk Management)
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