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Liquidity Risk and Expected Stock ReturnsLubos PastorUniversity of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER) Robert F. StambaughUniversity of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER) August 2001 CRSP Working Paper No. 531 Abstract: This study investigates whether market-wide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. Over a 34-year period, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5% annually, adjusted for exposures to the market return as well as size, value, and momentum factors.
Number of Pages in PDF File: 38 Keywords: Asset pricing, liquidity risk, expected returns JEL Classification: G12 working papers seriesDate posted: August 17, 2001Suggested CitationContact Information
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