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Dynamics in Systematic Liquidity

We develop the principal component analysis (PCA) approach to systematic liquidity measurement by introducing moving and expanding estimation windows. We evaluatethese methods along with traditional estimation techniques (full sample PCA and market average) in terms of ability to explain (1) cross-sectional stock liquidity and (2) cross-sectional stock returns. For several traditional liquidity measures our results suggest an expanding window specification for systematic liquidity estimation. However, for price impact liquidity measures we find support for a moving window specification. The market average proxy of systematic liquidity produces the same degree of commonality, but does not have the same ability to explain stock returns as the PCA-based estimates.

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File URL: http://project.nek.lu.se/publications/workpap/Papers/WP09_7.pdf
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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2009:7.

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Length: 34 pages
Date of creation: 25 May 2009
Date of revision:
Handle: RePEc:hhs:lunewp:2009_007
Contact details of provider: Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en

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