Asset pricing and systematic liquidity risk: An empirical investigation of the Spanish stock market
AbstractSystematic liquidity shocks should affect the optimal behavior of agents in financial markets. Indeed, fluctuations in various measures of liquidity are significantly correlated across common stocks. Accordingly, this paper empirically analyzes whether Spanish average returns vary cross sectionally with betas estimated relative to three competing liquidity risk factors. The first one, proposed by Pastor and Stambaugh (2003), is associated with the temporary price fluctuation reversals induced by the order flow. Our market-wide liquidity factor is defined as the difference between returns highly sensitive to changes in the relative bid–ask spread and returns with low sensitivities to those changes. Finally, the aggregate ratio of absolute stock returns to euro volume, as suggested by Amihud [J. Financ. Mark. 5 (2002) 31], is also employed. Our empirical results show that systematic liquidity risk is significantly priced in the Spanish stock market exclusively when betas are measured relative to the illiquidity risk factor based on the price response to one euro of trading volume on either unconditional or conditional versions of liquidity-based asset pricing models.
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Bibliographic InfoPaper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/7176.
Length: 105 p.
Date of creation: 2005
Date of revision:
Publication status: Published in International Review of Economics & Finance (2005) v. 14, p.81-103.
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Web page: http://www.uc3m.es
Systematic liquidity risk; Expected returns; Bid–ask spread; Order flow; Trading volume;
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- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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