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Dynamics in Systematic Liquidity

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  • Hagströmer, Björn

    ()
    (Aston Business School)

  • Anderson, Richard G.

    ()
    (Federal Reserve Bank of St. Louis)

  • Binner, Jane

    ()
    (Aston Business School)

  • Nilsson, Birger

    ()
    (Department of Economics, Lund University)

Abstract

We develop the principal component analysis (PCA) approach to systematic liquidity measurement by introducing moving and expanding estimation windows. We evaluatethese methods along with traditional estimation techniques (full sample PCA and market average) in terms of ability to explain (1) cross-sectional stock liquidity and (2) cross-sectional stock returns. For several traditional liquidity measures our results suggest an expanding window specification for systematic liquidity estimation. However, for price impact liquidity measures we find support for a moving window specification. The market average proxy of systematic liquidity produces the same degree of commonality, but does not have the same ability to explain stock returns as the PCA-based estimates.

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Bibliographic Info

Paper provided by Lund University, Department of Economics in its series Working Papers with number 2009:7.

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Length: 34 pages
Date of creation: 25 May 2009
Date of revision:
Handle: RePEc:hhs:lunewp:2009_007

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en
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Keywords: systematic liquidity; market liquidity; commonality; dynamic principal component analysis; robust PCA;

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