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Pricing Liquidity in the Stock Market

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

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  • Ding Du
  • Ou Hu

Abstract

In this study, we aim to test the pricing power of market liquidity in the cross-section of US stock returns. We examine three liquidity measures: Pástor and Stambaugh (2003)’s liquidity factor, Bali et al. (2014)’s liquidity shocks, and Dreshsler, Savov, and Schanbl (2017)’s money market liquidity premium. With a large set of test assets and the time-series regression approach of Fama and French (2015), we find that aggregate liquidity is not priced in the cross-sections of stock returns. That is, adding the liquidity factor to common asset-pricing models does not improve the performance of models significantly. Therefore, our results call for more research on the impact of aggregate liquidity on the stock market.

Suggested Citation

  • Ding Du & Ou Hu, 2020. "Pricing Liquidity in the Stock Market," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 121, pages 4119-4148, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0121
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    More about this item

    Keywords

    Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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