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Liquidity Risk?

Author

Listed:
  • Pontiff, Jeffrey
  • Singla, Rohit

Abstract

We revisit the role of liquidity risk. We successfully replicate Pastor and Stambaugh’s (2003) gamma liquidity risk index, and within their time period, concur with their risk premium estimate. An out-of-their-time-period analysis finds post-time-period returns that are higher and pre-time-period returns that are lower than in-time-period returns. Modest variations to the index that are intended to improve power—such as value weighting, including zero volume days, including all stock price levels, and a modification intended to reduce estimation error—all cast doubt on whether the gamma premium is compensation for liquidity risk. We create five alternative liquidity risk indices from various popular liquidity proxies. Using time-series that start in either 1932 or 1968, none of the 10 specifications produce statistically significant risk premia.

Suggested Citation

  • Pontiff, Jeffrey & Singla, Rohit, 2019. "Liquidity Risk?," Critical Finance Review, now publishers, vol. 8(1-2), pages 257-276, December.
    • Handle: RePEc:now:jnlcfr:104.00000075
    DOI: 10.1561/104.00000075
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    Cited by:

    1. Pástor, Luboš & Stambaugh, Robert F., 2019. "Liquidity Risk After 20 Years," Critical Finance Review, now publishers, vol. 8(1-2), pages 277-299, December.

    More about this item

    Keywords

    Liquidity; Risk; Factor model; Replication;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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