Time-Varying Liquidity Risk and the Cross Section of Stock Returns
Posted: 15 Dec 2008
There are 3 versions of this paper
Time-Varying Liquidity Risk and the Cross Section of Stock Returns
Time-Varying Liquidity Risk and the Cross Section of Stock Returns
Date Written: November 2008
Abstract
This paper studies whether stock returns' sensitivities to aggregate liquidity fluctuations and the pricing of liquidity risk vary over time. We find that liquidity betas vary across two distinct states: one with high liquidity betas and the other with low betas. The high liquidity-beta state is short lived and characterized by heavy trade, high volatility, and a wide cross-sectional dispersion in liquidity betas. It also delivers a disproportionately large liquidity risk premium, amounting to more than twice the value premium. Our results are consistent with a model of liquidity risk in which investors face uncertainty about their trading counterparties' preferences.
Keywords: G12
Suggested Citation: Suggested Citation
Akiko Watanabe (Contact Author)
University of Alberta - School of Business ( email )
3-30A Business Building
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-0385 (Phone)
780-492-3325 (Fax)
HOME PAGE: http://www.bus.ualberta.ca/awatanabe
University of Alberta - Department of Finance and Statistical Analysis ( email )
2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
HOME PAGE: http://www.bus.ualberta.ca/awatanabe
Masahiro Watanabe
University of Alberta - School of Business ( email )
School of Business - FMS
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-7343 (Phone)
780-492-3325 (Fax)
HOME PAGE: http://www.ualberta.ca/~masa/
University of Alberta - Department of Finance and Statistical Analysis ( email )
2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada