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Does Commonality in Illiquidity Matter to Investors?

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Anderson, Richard G. & Binner, Jane M. & Hagströmer, Björn & Nilsson, Birger, 2013. "Does Commonality in Illiquidity Matter to Investors?," Working Papers 2013:24, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2013_024
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    References listed on IDEAS

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    Cited by:

    1. Beyene, Nardos & Huang, Peng & Hueng, C. James, 2021. "Illiquidity contagion and pricing of commonality risk: Evidence from a dynamic conditional correlation model," Finance Research Letters, Elsevier, vol. 39(C).
    2. Martin Hoesli & Anjeza Kadilli & Kustrim Reka, 2017. "Commonality in Liquidity and Real Estate Securities," The Journal of Real Estate Finance and Economics, Springer, vol. 55(1), pages 65-105, July.

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    More about this item

    Keywords

    commonality; commonality risk premium; asset illiquidity; systematic illiquidity; liquidity; effective tick;
    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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