To do this, we used 6 risk measures in a multiple regression model. Liquidity risk and expected stock returns ebook, 2001. Our monthly liquidity measure, an average of individual stock measures estimated with daily data, relies on the principle that order flow. Liquidity risk and expected stock returns nyu stern. Thus, expected stock return was denoted by eri, risk free rate was denoted by rf, stock beta was denoted by.
Using a fivefactor model, the results suggest that idiosyncratic risk does not play a role on stock returns for most of. Oclcs webjunction has pulled together information and resources to assist library staff as they consider how to handle coronavirus. Liquidity risk and expected stock returns scholarlycommons. Liquidity risk and expected stock returns in korea wiley online. Understanding how idiosyncratic risk, liquidity and stock returns interact with each other can help us to understand the current set of findings in these areas and to sort out which market attributes are or are not priced. Liquidity risk and expected corporate bond returns. Liquidity biases and the pricing of crosssectional. Our monthly liquidity measure, an average of individualstock measures estimated with daily data, relies on the principle.
Robert f stambaugh the journal of political economy. Our monthly liquidity measure, an average of individual. Liquidity risk and expected stock returns econpapers. Further reproduction prohibited without permission. Harvey duke university, national bureau of economic research christian lundblad university of north carolina at chapel hill given the crosssectional and temporal variation in their liquidity. We find that expected stock returns are related crosssectionally to the sensitivities of returns to fluctuations in aggregate liquidity. We find that expected stock returns are related crosssectionally to the. As liquidity is not observable, different economists suggest various proxies for liquidity and models that test liquidity pricing on the market. The authors report that stocks with more volatile liquidity have lower expected returns, an unexpected result. Sellorder liquidity and the crosssection of expected. The positive correlation between the volatility of liquidity and expected returns suggests that risk averse investors require a. Liquidity risk and expected stock returns, crsp working papers 531, center for research in security prices, graduate school of business, university of chicago. Idiosyncratic volatility, momentum, liquidity, and expected stock returns in developed and emerging markets. Lessons from emerging markets geert bekaert columbia university, national bureau of economic research campbell r.
The positive correlation between the volatility of liquidity and expected returns suggests that risk averse investors require a risk premium for holding stocks with high variation in liquidity. There are literally thousands of different types of financial instruments in the capital markets to choose from. We examine in an eventstudy context what factors affect the relative performance of stocks during liquidity crises. A large number of studies have focused on measuring this effect in developed markets and few in emerging markets, especially the chilean one. This premium is not due to a systematic risk, but the characteristics of the stocks. The latters relation to expected stock returns has been investigated by numerous empirical studies, including amihud and mendelson 1986, brennan and subrahmanyam 1996, brennan, chordia, and subrah. Unlimited viewing of the article pdf and any associated supplements and. Our monthly liquidity measure, an average of individualstock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. However, in the event of a crisis specific to a bank, its access to. Download citation liquidity risk and expected stock returns this study. Out of the stocks i form seven portfolios based on decreasing liquidity in order to check whether there is an effect on expected returns through portfolios with.
Liquidity risk and expected stock returns researchgate. We find that expected stock returns are related crossse. Liquidity risk and expected stock returns journal of. Instead, abnormal stock returns during liquidity crises are strongly negatively related to liquidity risk, measured by the comovement of stock returns with market liquidity. Stambaugh university of pennsylvania and national bureau of economic research this study investigates whether marketwide liquidity is a state variable important for asset pricing. This study analyzes the impact of liquidity risk on the return of shares in the chilean stock market, during the period from january 2000 to july 2018. On the other hand, the riskimpact of market liquidity on expected stock returns has also been extensively studied, both theoretically and empirically huberman and halka 1999, chordia, roll and. We first calculate a measure of liquidity risk, referred to as the liquidity gap lg, which reflects how much of a banks volatile liabilities are covered by its stock of. Liquidity risk and expected stock returns book, 2001. Asset liquidity and stock liquidity journal of financial.
Liquidity risk and expected stock returns lubos pastor, robert f. Liquidity risk and expected stock returns by lubos pastor. Liquidity effects on valueatrisk limitsconstruction of a new var model. This study investigates whether marketwide liquidity is a state variable important for asset pricing. July 11, 2002 abstract this study investigates whether marketwide liquidity is a state variable important. To measure all the data regression and correlation was used. Numerous and frequentlyupdated resource results are available from this search. We find that expected stock returns are related crosssectionally to the sensitivities. By controlling for the effects of other risk variables, multivariate independent portfolio sorts should provide clearer evidence for the relation between. However, recent empirical tests have not examined the interaction between these two factors. Liquidity and idiosyncratic risk abstract the roles played by idiosyncratic risk and liquidity in determining stock returns have recently received a great deal of attention. After, a number of research is done on this topic, analyzing expected returns, asset pricing and systematic liquidity risk. However, univariate relations could be confounded by the correlation between liquidity risk and other risk variables. Liquidity risk is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.
Idiosyncratic volatility, momentum, liquidity, and. Analyzing liquidity risk and expected stock returns is presented by jang j. August, 2001 abstract this study investigates whether marketwide liquidity is a state variable important for asset pricing. Liquidity risk and expected stock returns by lubos pastor, robert. Numerous studies have shown that the mean level of liquidity is positively priced. The latters relation to expected stock returns has been investigated by numerous empirical studies, including amihud and mendelson.
Our monthly liquidity measure, an average of individualstock measures estimated with daily data, relies on the principle that order flow. Characteristic liquidity, systematic liquidity and. Asset pricing this study investigates whether marketwide liquidity is a state variable important for asset pricing. Liquidity is how easily an asset or security can be bought or sold in the market, and converted to cash. If you want high liquidity and low risk, youre going to have a low. Risk, return and liquidity capital markets the term capital markets refers to the various markets like stock and bond markets where businesses can go to raise capital and where you can invest your money in financial instruments. Idiosyncratic risk and the crosssection of stock returns. Liquidity risk and expected stock returns lubos pastor. Liquidity risk management in banks is defined as the risk of being unable either to meet their. The second hypothesis for the liquidity effect states that the high expected returns for illiquid stocks are compensation for a market level systematic liquidity risk. We find that expected stock returns are related cross. Financial intermediaries and the crosssection of asset. Numerous papers find that liquidity is negatively related to expected stock returns. In search of liquidity risk in bank stock returns by.
On the other hand, the risk impact of market liquidity on expected stock returns has also been extensively studied, both theoretically and empirically huberman and halka 1999, chordia, roll and. Liquidity risk and expected stock returns, nber working papers 8462, national bureau of economic research, inc. Liquidity risk and expected stock returns in korea. Reliable information about the coronavirus covid19 is available from the world health organization current situation, international travel. The authors thank ariel zucker and daniel green for outstanding research assistance. Lessons from emerging markets geert bekaert columbia university, new york, ny 10027 usa. Funding liquidity and the cross section of stock returns adrian and etula, 2010 and intermediary leverage and the crosssection of expected returns muir, 2010. View the article pdf and any associated supplements and figures for a period of 48 hours.
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