Our monthly liquidity measure, an average of individualstock measures estimated with daily data, relies on the principle. Liquidity risk and expected stock returns econpapers. Numerous studies have shown that the mean level of liquidity is positively priced. If you want high liquidity and low risk, youre going to have a low. 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. Liquidity risk and expected stock returns ebook, 2001. Oclcs webjunction has pulled together information and resources to assist library staff as they consider how to handle coronavirus. Numerous and frequentlyupdated resource results are available from this search.
Robert f stambaugh the journal of political economy. Liquidity risk and expected stock returns by lubos pastor. Instead, abnormal stock returns during liquidity crises are strongly negatively related to liquidity risk, measured by the comovement of stock returns with market liquidity. By controlling for the effects of other risk variables, multivariate independent portfolio sorts should provide clearer evidence for the relation between. The authors thank ariel zucker and daniel green for outstanding research assistance. Our monthly liquidity measure, an average of individual. Numerous papers find that liquidity is negatively related to expected stock returns.
To do this, we used 6 risk measures in a multiple regression model. We find that expected stock returns are related crosssectionally to the sensitivities of returns to fluctuations in aggregate liquidity. A large number of studies have focused on measuring this effect in developed markets and few in emerging markets, especially the chilean one. After, a number of research is done on this topic, analyzing expected returns, asset pricing and systematic liquidity risk. Thus, expected stock return was denoted by eri, risk free rate was denoted by rf, stock beta was denoted by. There are literally thousands of different types of financial instruments in the capital markets to choose from.
Using a fivefactor model, the results suggest that idiosyncratic risk does not play a role on stock returns for most of. Financial intermediaries and the crosssection of asset. Sellorder liquidity and the crosssection of expected stock returns. Lessons from emerging markets geert bekaert columbia university, national bureau of economic research campbell r. Liquidity risk management in banks is defined as the risk of being unable either to meet their. However, univariate relations could be confounded by the correlation between liquidity risk and other risk variables. Our monthly liquidity measure, an average of individual stock measures estimated with daily data, relies on the principle that order flow. We find that expected stock returns are related crosssectionally to the. Characteristic liquidity, systematic liquidity and. Unlimited viewing of the article pdf and any associated supplements and.
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. Liquidity risk and expected stock returns journal of. This study investigates whether marketwide liquidity is a state variable important for asset pricing. However, recent empirical tests have not examined the interaction between these two factors. This premium is not due to a systematic risk, but the characteristics of the stocks.
As liquidity is not observable, different economists suggest various proxies for liquidity and models that test liquidity pricing on the market. Analyzing liquidity risk and expected stock returns is presented by jang j. Idiosyncratic volatility, momentum, liquidity, and expected stock returns in developed and emerging markets. 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. We find that market risk, measured by the market beta, is not a good measure of expected abnormal stock returns on days with liquidity crises. Liquidity risk and expected stock returns scholarlycommons. Liquidity risk and expected stock returns abstract this study investigates whether marketwide liquidity is a state variable important for asset pricing.
Liquidity risk and expected stock returns researchgate. 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. Liquidity risk and expected stock returns in korea. View the article pdf and any associated supplements and figures for a period of 48 hours. Stambaugh university of pennsylvania and national bureau of economic research this study investigates whether marketwide liquidity is a state variable important for asset pricing. Liquidity risk and expected corporate bond returns. We examine in an eventstudy context what factors affect the relative performance of stocks during liquidity crises. 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. Idiosyncratic risk and the crosssection of stock returns. Liquidity biases and the pricing of crosssectional. Liquidity risk and expected stock returns lubos pastor, robert f. We document that higher measures of liquidity risk on banks balance sheets are associated with lower expected stock returns. We find that expected stock returns are related crosssectionally to the sensitivities.
Sellorder liquidity and the crosssection of expected. To measure all the data regression and correlation was used. Asset pricing this study investigates whether marketwide liquidity is a state variable important for asset pricing. 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. July 11, 2002 abstract this study investigates whether marketwide liquidity is a state variable important. 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. 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 lubos pastor. We find that expected stock returns are related cross. Idiosyncratic volatility, momentum, liquidity, and. Asset liquidity and stock liquidity journal of financial. We find that expected stock returns are related crossse. Liquidity risk and expected stock returns book, 2001. Further reproduction prohibited without permission.
Liquidity risk and expected stock returns, crsp working papers 531, center for research in security prices, graduate school of business, university of chicago. August, 2001 abstract this study investigates whether marketwide liquidity is a state variable important for asset pricing. The positive correlation between the volatility of liquidity and expected returns suggests that risk averse investors require a. Liquidity risk and expected stock returns in korea wiley online. Liquidity risk and expected stock returns nyu stern.
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. The latters relation to expected stock returns has been investigated by numerous empirical studies, including amihud and mendelson. Liquidity effects on valueatrisk limitsconstruction of a new var model. However, in the event of a crisis specific to a bank, its access to. 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.
Liquidity is how easily an asset or security can be bought or sold in the market, and converted to cash. Our monthly liquidity measure, an average of individualstock measures estimated with daily data, relies on the principle that order flow. 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. Download citation liquidity risk and expected stock returns this study. Liquidity risk and expected stock returns by lubos pastor, robert. 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. 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. Reliable information about the coronavirus covid19 is available from the world health organization current situation, international travel. In search of liquidity risk in bank stock returns by. 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. 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.
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