Liquidity Level or Liquidity Risk? Evidence from the Financial Crisis

Lou, Xiaoxia; Sadka, Ronnie

doi:10.2139/ssrn.1622885

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Liquidity Level or Liquidity Risk? Evidence from the Financial Crisis

19 Pages Posted: 9 Jun 2010 Last revised: 1 Feb 2013

See all articles by Xiaoxia Lou

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics

Ronnie Sadka

Boston College - Carroll School of Management

There are 2 versions of this paper

Date Written: October 25, 2010

Abstract

This paper distinguishes between a stock's liquidity (liquidity level), as measured by the average cost of trading it, and its liquidity beta (liquidity risk), as measured by the covariation of its return with unexpected changes in aggregate liquidity. Although considered safe assets in general, liquid stocks underperformed illiquid stocks during the financial crisis of 2008--2009. The performance of stocks during the crisis can be better explained by their historical liquidity betas. These findings therefore highlight the importance of accounting for both liquidity level and liquidity risk in risk-management applications.

Keywords: Liquidity risk, Liquidity Level, Asset pricing, Risk Management, Financial Crisis

JEL Classification: G12, G14, G23

Suggested Citation: Suggested Citation

Lou, Xiaoxia and Sadka, Ronnie, Liquidity Level or Liquidity Risk? Evidence from the Financial Crisis (October 25, 2010). Available at SSRN: https://ssrn.com/abstract=1622885 or http://dx.doi.org/10.2139/ssrn.1622885