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How do volatility regimes affect the pricing of quality and liquidity in the stock market?

Author

Listed:
  • Bazgour, Tarik
  • Heuchenne, Cédric

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

  • Hübner, Georges
  • Sougné, Danielle

Abstract

This paper shows how stock market volatility regimes affect the cross-section of stock returns along quality and liquidity dimensions. We find that, during crisis periods, low quality and low liquidity stocks experience relatively higher losses than predicted in normal times, while high quality and high liquidity stocks experience rather relatively lower losses. These findings lend strong support to the presence of cross-market and within-market flight-to-quality and to-liquidity episodes during crisis periods. During low volatility periods, however, low quality and low liquidity stocks earn relatively larger returns, while high quality and high liquidity stocks yield lower returns; suggesting that low volatility conditions benefit junk and illiquid stocks but not quality and liquid stocks. Finally, our results reveal that liquidity level dominates liquidity beta in explaining stock returns across the different market volatility regimes.

Suggested Citation

  • Bazgour, Tarik & Heuchenne, Cédric & Hübner, Georges & Sougné, Danielle, 2021. "How do volatility regimes affect the pricing of quality and liquidity in the stock market?," LIDAM Reprints ISBA 2021038, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvar:2021038
    DOI: https://doi.org/10.1515/snde-2018-0127
    Note: In: Studies in Nonlinear Dynamics & Econometrics, 2021, vol. 25(1), p. 20180127
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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