The Risk Components of Liquidity

24 Pages Posted: 17 Mar 2008

See all articles by Lorán Chollete

Lorán Chollete

UiS Business School

Randi Naes

Norwegian Ministry of Trade and Industry

Johannes Atle Skjeltorp

Central Bank of Norway

Date Written: March 4, 2008

Abstract

Does liquidity risk differ depending on our choice of liquidity proxy? Unlike literature that considers common liquidity variation, we focus on identifying different components of liquidity, statistically and economically, using more than a decade of US transaction data. We identify three main statistical liquidity factors which are utilized in a linear asset pricing framework. We motivate a correspondence of the statistical factors to traditional dimensions of liquidity as well as the notion of order and trade based liquidity measures. We find evidence of multiple liquidity risk premia, but only a subset of the financial liquidity factors are associated with significant risk premia. These are the factors that we relate to the dimensions of immediacy and resilliency, while the depth dimension does not command a risk premium in any of the models. Our results suggests caution when choosing liquidity variables in asset pricing applications, since liquidity premia may be reflected in only some dimensions of liquidity.

Keywords: Liquidity Risk, Liquidity Factors, Asset Pricing, Market Microstructure

JEL Classification: G12, G14

Suggested Citation

Chollete, Loran and Naes, Randi and Skjeltorp, Johannes Atle, The Risk Components of Liquidity (March 4, 2008). EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1102205 or http://dx.doi.org/10.2139/ssrn.1102205

Loran Chollete

UiS Business School ( email )

PB 8002
Stavanger, 4036
Norway

Randi Naes

Norwegian Ministry of Trade and Industry ( email )

P.O. Box 8014 Dep
N-0030 Oslo
Norway
+47 22 24 04 34 (Phone)
+47 22 42 40 62 (Fax)

Johannes Atle Skjeltorp (Contact Author)

Central Bank of Norway ( email )

P.O. Box 1179
Oslo, N-0107
Norway

HOME PAGE: http://www.norges-bank.no/research/skjeltorp/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
428
Abstract Views
2,745
Rank
137,182
PlumX Metrics