IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Asset Pricing And Systematic Liquidity Risk: An Empirical Investigation Of The Spanish Stock Market

  • Miguel A. Martínez

    ()

  • Belén Nieto

    ()

  • Gonzalo Rubio

    ()

  • Mikel Tapia

    ()

It seems reasonable to expect systematic liquidity shocks to affect the optimal behavior of agents in financial markets. Indeed, fluctuations in various measures of liquidity are significantly correlated across common stocks(Chordia, Roll and Subrahmanyam (2000)). Thus, this paper empirically analyzes whether Spanish expected returns during the nineties are associated cross-sectionally to betas estimated relative to two competing liquidity risk factors. On one hand, we propose a new market-wide liquidity factor which is defined as the difference between returns of stocks highly sensitive to changes in the relative bid-ask spread less returns from stocks with low sensitivities to those changes. We argue that stocks with positive covariability between returns and this factor are assets whose returns tend to go down when aggregate liquidity is low, and hence do not hedge a potential liquidity crisis. Consequently, investors will require a premium to hold these assets. Similarly, note that in the case of assets that covary negatively with the liquidity factor, investors may be willing to pay a premium rather than to require an additional compensation. On the other hand, Pastor and Stambaugh (2002) suggest that a reasonable liquidity risk factor should be associated with the strength of volume-related return reversals since order flow induces greater return reversals when liquidity is lower. Our empirical results show that neither of these proxies for systematic liquidity risk carries a premium in the Spanish stock market.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://docubib.uc3m.es/WORKINGPAPERS/WB/wb026022.pdf
Download Restriction: no

Paper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb026022.

as
in new window

Length:
Date of creation: Jan 2002
Date of revision:
Handle: RePEc:cte:wbrepe:wb026022
Contact details of provider: Postal: Calle Madrid 126, 28903 Getafe (Madrid)
Phone: +34 91 624-9630
Fax: +34 91 624-9608
Web page: http://portal.uc3m.es/portal/page/portal/dpto_economia_empresa

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Olivier Renault & Jan Ericsson, 2000. "Liquidity and Credit Risk," FMG Discussion Papers dp362, Financial Markets Group.
  2. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
  3. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  4. Pástor, Luboš & Stambaugh, Robert F., 2002. "Liquidity Risk and Expected Stock Returns," CEPR Discussion Papers 3494, C.E.P.R. Discussion Papers.
  5. Hanno Lustig, 2001. "The Market Price of Aggregate Risk and the Wealth Distribution," Finance 0111004, EconWPA, revised 16 Nov 2001.
  6. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Harvard Institute of Economic Research Working Papers 1897, Harvard - Institute of Economic Research.
  7. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 56(1), pages 3-28, April.
  8. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
  9. Acharya, Viral V & Pedersen, Lasse Heje, 2003. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 3749, C.E.P.R. Discussion Papers.
  10. Bengt Holmstrom & Jean Tirole, 1998. "LAPM: A Liquidity Based Asset Pricing Model," Working papers 98-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, vol. 59(3), pages 383-411, March.
  12. Campbell, John Y & Grossman, Sanford J & Wang, Jiang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 905-39, November.
  13. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Order Imbalance, Liquidity, and Market Returns," University of California at Los Angeles, Anderson Graduate School of Management qt7gh9t9w3, Anderson Graduate School of Management, UCLA.
  14. George M. Constantinides, 2002. "Rational Asset Prices," NBER Working Papers 8826, National Bureau of Economic Research, Inc.
  15. Belén Nieto, 2002. "La valoración intertemporal de activos: un análisis empírico para el mercado español de valores," Investigaciones Economicas, Fundación SEPI, vol. 26(3), pages 497-524, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cte:wbrepe:wb026022. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.