The Time-Varying Liquidity Risk of Value and Growth Stocks

47 Pages Posted: 19 Mar 2010

See all articles by Ferhat Akbas

Ferhat Akbas

University of Illinois at Chicago

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business

Egemen Genc

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Ralitsa Petkova

Case Western Reserve University - Department of Banking & Finance

Date Written: March 10, 2010

Abstract

We study the liquidity exposures of value and growth stocks over business cycles. In worst times, value stocks have higher liquidity betas than in best times, while the opposite holds for growth stocks. Small value stocks have higher liquidity exposures than small growth stocks in worst times, while small growth stocks have higher liquidity exposures than small value stocks in best times. Combined with the fact that growth stocks have lower market risk than value stocks in bad times (as documented by Petkova and Zhang, 2005), our results are consistent with a flight-to-quality explanation for the countercyclical nature of the value premium. Investors seeking safer assets in bad times may want to liquidate value stocks more aggressively than growth stocks. This increase in selling pressure could make value stocks more sensitive to liquidity risk than growth stocks in recessions. We show that the relative order imbalances of value-minus-growth strategies decreases as economic conditions worsen. This suggests that in bad times investors sell value stocks more aggressively than growth stocks, and this activity results in relatively greater illiquidity in value stocks. Overall, exposure to time-varying liquidity risk, combined with the liquidity price of risk, is able to capture 35% of the small-stock value premium and 100% of the large-stock value premium.

Suggested Citation

Akbas, Ferhat and Boehmer, Ekkehart and Genc, Egemen and Petkova, Ralitsa, The Time-Varying Liquidity Risk of Value and Growth Stocks (March 10, 2010). Available at SSRN: https://ssrn.com/abstract=1572763 or http://dx.doi.org/10.2139/ssrn.1572763

Ferhat Akbas (Contact Author)

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60076
United States

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

Egemen Genc

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Ralitsa Petkova

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

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