Liquidity Level or Liquidity Risk? Evidence from the Financial Crisis
University of Delaware - Alfred Lerner College of Business and Economics
Boston College - Carroll School of Management
October 25, 2010
This paper distinguishes between a stock's liquidity (liquidity level), as measured by the average cost of trading it, and its liquidity beta (liquidity risk), as measured by the covariation of its return with unexpected changes in aggregate liquidity. Although considered safe assets in general, liquid stocks underperformed illiquid stocks during the financial crisis of 2008--2009. The performance of stocks during the crisis can be better explained by their historical liquidity betas. These findings therefore highlight the importance of accounting for both liquidity level and liquidity risk in risk-management applications.
Number of Pages in PDF File: 19
Keywords: Liquidity risk, Liquidity Level, Asset pricing, Risk Management, Financial Crisis
JEL Classification: G12, G14, G23
Date posted: June 9, 2010 ; Last revised: February 1, 2013
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