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Does Commonality in Illiquidity Matter to Investors?

  • Anderson, Richard G.

    ()

    (Federal Reserve Bank of St. Louis)

  • Binner, Jane M.

    ()

    (Sheffield University Management School)

  • Hagströmer, Björn

    ()

    (Stockholm University School of Business)

  • Nilsson, Birger

    ()

    (Department of Economics, Lund University)

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 signi cant. 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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File URL: http://project.nek.lu.se/publications/workpap/papers/WP13_24.pdf
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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2013:24.

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Length: 50 pages
Date of creation: 31 May 2013
Date of revision:
Handle: RePEc:hhs:lunewp:2013_024
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Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden

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Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en

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  1. Brockman, Paul & Chung, Dennis Y. & Pérignon, Christophe, 2009. "Commonality in Liquidity: A Global Perspective," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(04), pages 851-882, August.
  2. Harris, Lawrence, 1991. "Stock Price Clustering and Discreteness," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 389-415.
  3. Paul Brockman & Dennis Y. Chung, 2002. "Commonality in Liquidity: Evidence from an Order-Driven Market Structure," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(4), pages 521-539.
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