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Liquidity risk and stock returns around the world

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  • Liang, Samuel Xin
  • Wei, John K.C.

Abstract

The recent global financial crisis demonstrates that market liquidity is a prominent systematic risk globally. We find that local liquidity risk, in addition to the local market, value and size factors, demands a systematic premium across stocks in 11 developed markets. This local pricing premium is smaller in countries where the country-level corporate boards are more effective and where there are less insider trading activities. We also discover that global liquidity risk is a significant pricing factor across all developed country market portfolios after controlling for global market, value, and size factors. The contribution of this risk to the return on a country market portfolio is economically and statistically significant within and across regions.

Suggested Citation

  • Liang, Samuel Xin & Wei, John K.C., 2012. "Liquidity risk and stock returns around the world," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3274-3288.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3274-3288
    DOI: 10.1016/j.jbankfin.2012.07.021
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    More about this item

    Keywords

    Liquidity risk; Risk premium; International markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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