Liquileaks

47 Pages Posted: 21 Feb 2011 Last revised: 9 Mar 2012

See all articles by Albert J. Menkveld

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Ting Wang

VU University Amsterdam

Date Written: March 8, 2012

Abstract

A security’s liquidity properties have been studied in terms of mean and variance: liquidity level and liquidity risk, respectively. This paper explores tail events, liquidity disaster risk. Liquidity might not be a worry to investors in normal market conditions, but it does become a first-order concern in case the security not only hits an illiquid state, but is also trapped in it so that waiting a day will not restore liquidity. Empirically, such events, referred to as liquidity leaks or liquileaks, can be characterized with a Markov regime-switching model that alternates between a liquid and an illiquid state. Liquileak risk is naturally defined as the probability of finding the security in the illiquid state for more than a week. This probability is estimated based on an unbalanced sample of 2147 stocks from 1963 through 2008. Standard Fama-MacBeth regressions show that a one standard deviation increase in liquileak probability commands an annual premium of 1.33%. This premium has increased over time.

JEL Classification: G12

Suggested Citation

Menkveld, Albert J. and Wang, Ting, Liquileaks (March 8, 2012). Available at SSRN: https://ssrn.com/abstract=1763417 or http://dx.doi.org/10.2139/ssrn.1763417

Albert J. Menkveld (Contact Author)

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Ting Wang

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081HV
Netherlands

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