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Does commonality in illiquidity matter to investors?

  • Richard G. Anderson
  • Jane M. Binner
  • Björn Hagströmer
  • Birger Nilsson

This paper investigates whether investors are compensated for taking on commonality risk in equity portfolios. A large literature documents the existence and the causes of commonality in illiquidity, but the implications for investors are less understood. We find a return premium for commonality risk in NYSE stocks that is both economically and statistically significant. The commonality risk premium is independent of illiquidity level effects, and robust to variations in illiquidity measurement and systematic illiquidity estimation. We also show that precision in commonality risk estimation can be increased by the use of daily illiquidity measures, instead of monthly.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-020.

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Date of creation: 2013
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Handle: RePEc:fip:fedlwp:2013-020
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