Dynamics in Systematic Liquidity

FRB of St. Louis Working Paper No. 2009-025A

36 Pages Posted: 27 May 2009

See all articles by Björn Hagströmer

Björn Hagströmer

Stockholm University - Stockholm Business School

Richard G. Anderson

Federal Reserve Bank of St. Louis - Research Division

Jane M. Binner

University of Birmingham - Department of Accounting and Finance

Birger Nilsson

Lund University - Department of Economics

Date Written: May 26, 2009

Abstract

We develop the principal component analysis (PCA) approach to systematic liquidity measurement by introducing moving and expanding estimation windows. We evaluate these methods along with traditional estimation techniques (full sample PCA and market average) in terms of ability to explain (1) cross-sectional stock liquidity and (2) cross-sectional stock returns. For several traditional liquidity measures our results suggest an expanding window specification for systematic liquidity estimation. However, for price impact liquidity measures we find support for a moving window specification. The market average proxy of systematic liquidity produces the same degree of commonality, but does not have the same ability to explain stock returns as the PCA-based estimates.

Keywords: systematic liquidity, market liquidity, commonality, dynamic principal component analysis, robust PCA

JEL Classification: G10, C02

Suggested Citation

Hagströmer, Björn and Anderson, Richard G. and Binner, Jane M. and Nilsson, Birger, Dynamics in Systematic Liquidity (May 26, 2009). FRB of St. Louis Working Paper No. 2009-025A. Available at SSRN: https://ssrn.com/abstract=1410708 or http://dx.doi.org/10.2139/ssrn.1410708

Björn Hagströmer

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

Richard G. Anderson (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Jane M. Binner

University of Birmingham - Department of Accounting and Finance ( email )

Birmingham, B15 2TY
United Kingdom

Birger Nilsson

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden

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