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Liquidity and Liquidity Risk in the Cross-Section of Stock Returns

Author

Listed:
  • Volodymyr Vovchak

    (Swiss Finance Institute)

Abstract

This paper examines the relative importance of liquidity level and liquidity risk for the cross-section of stock returns. A portfolio analysis is implemented to make inferences about the pricing ability of liquidity as a characteristic or as a risk. I find that the ratio of absolute returns-to-volume, the Amihud liquidity measure, is able to explain more variance in stock returns than a battery of liquidity risk measures. My results suggest that trading cost and frictions impact financial markets more than the systemic components of liquidity.

Suggested Citation

  • Volodymyr Vovchak, 2012. "Liquidity and Liquidity Risk in the Cross-Section of Stock Returns," Swiss Finance Institute Research Paper Series 12-44, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1244
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    File URL: http://ssrn.com/abstract=2078295
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    More about this item

    Keywords

    Liquidity; Liquidity risk; Asset pricing;
    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

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