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Liquidity Risk After 20 Years

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  • Lubos Pastor
  • Robert F. Stambaugh

Abstract

The Critical Finance Review commissioned Li, Novy-Marx, and Velikov (2017) and Pontiff and Singla (2019) to replicate the results in Pástor and Stambaugh (2003). Both studies successfully replicate our market-wide liquidity measure and find similar estimates of the liquidity risk premium. In the sample period after our study, the liquidity risk premium estimates are even larger, and the liquidity measure displays sharp drops during the 2008 financial crisis. We respond to both replication studies and offer some related thoughts, such as when to use our traded versus non-traded liquidity factors and how to improve the precision of liquidity beta estimates.

Suggested Citation

  • Lubos Pastor & Robert F. Stambaugh, 2019. "Liquidity Risk After 20 Years," NBER Working Papers 25774, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25774
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    References listed on IDEAS

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    Cited by:

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    2. François-Éric Racicot & Raymond Théoret, 2022. "Tracking market and non-traditional sources of risks in procyclical and countercyclical hedge fund strategies under extreme scenarios: a nonlinear VAR approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-56, December.
    3. Valentina Cioli & Tronconi Giacomo & Alessandro Giannozzi & Oliviero Roggi, 2023. "Stock Liquidity and Corporate Investment Policy after FTSE 100 Index Additions," International Journal of Business and Management, Canadian Center of Science and Education, vol. 17(10), pages 1-20, February.
    4. Paul Brockman & Dennis Y Chung & Neal M Snow, 2023. "Search-Based Peer Groups and Commonality in Liquidity," Review of Finance, European Finance Association, vol. 27(1), pages 33-77.
    5. Hong Zhao & Zixuan Jiao & Jianrong Wang & Amina Kamar, 2021. "Corporate Social Responsibility and Firm Liquidity Risk: U.S. Evidence," Sustainability, MDPI, vol. 13(22), pages 1-16, November.
    6. Rapheedah Musneh & Mohd. Rahimie Abdul Karim & Caroline Geetha A/P Arokiadasan Baburaw, 2021. "Liquidity risk and stock returns: empirical evidence from industrial products and services sector in Bursa Malaysia," Future Business Journal, Springer, vol. 7(1), pages 1-10, December.
    7. Song, Ziyu & Yu, Changrui, 2022. "Investor sentiment indices based on k-step PLS algorithm: A group of powerful predictors of stock market returns," International Review of Financial Analysis, Elsevier, vol. 83(C).
    8. Racicot, François-Éric & Théoret, Raymond & Gregoriou, Greg N., 2021. "The response of hedge fund higher moment risk to macroeconomic and illiquidity shocks," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 289-318.
    9. Beaulieu, Marie-Claude & Dufour, Jean-Marie & Khalaf, Lynda & Melin, Olena, 2023. "Identification-robust beta pricing, spanning, mimicking portfolios, and the benchmark neutrality of catastrophe bonds," Journal of Econometrics, Elsevier, vol. 236(1).

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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