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Pricing the Commonality Across Alternative Measures of Liquidity
Robert A. Korajczyk Northwestern University - Kellogg School of Management Ronnie Sadka Boston College - Department of Finance and Department of Finance September 13, 2007 Abstract: We estimate latent factor models of liquidity, aggregated across various liquidity measures. Shocks to assets' liquidity have a common component across measures which accounts for most of the explained variation in individual liquidity measures. We find that across-measure systematic liquidity is a priced factor while within-measure systematic liquidity does not exhibit additional pricing information. Controlling for across-measure systematic liquidity risk, there is some evidence that liquidity, as a characteristic of assets, is priced in the cross-section. Our results are robust to the inclusion of other equity characteristics and risk factors, such as market capitalization, book-to-market, and momentum.
Keywords: Liquidity, Risk Premium JEL Classifications: G1, G13 Working Paper SeriesDate posted: May 11, 2006 ; Last revised: September 18, 2007Suggested CitationContact Information
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