Joint Extreme Events in Equity Returns and Liquidity and their Cross-Sectional Pricing Implications

89 Pages Posted: 1 Apr 2013 Last revised: 12 Mar 2020

See all articles by Stefan Ruenzi

Stefan Ruenzi

University of Mannheim - Department of International Finance

Michael Ungeheuer

Aalto University

Florian Weigert

University of Neuchatel - Institute of Financial Analysis; University of Cologne - Centre for Financial Research (CFR)

Date Written: March 11, 2020

Abstract

We merge the literature on downside return risk and liquidity risk and introduce the concept of extreme downside liquidity (EDL) risks. The cross-section of stock returns reflects a premium if a stock's return (liquidity) is lowest at the same time when the market liquidity (return) is lowest. This effect is not driven by linear or downside liquidity risk or extreme downside return risk and is mainly driven by more recent years. There is no premium for stocks whose liquidity is lowest when market liquidity is lowest.

Keywords: Asset Pricing, Crash Aversion, Downside Risk, Liquidity Risk, Tail Risk

JEL Classification: C12, C13, G01, G11, G12, G17

Suggested Citation

Ruenzi, Stefan and Ungeheuer, Michael and Weigert, Florian, Joint Extreme Events in Equity Returns and Liquidity and their Cross-Sectional Pricing Implications (March 11, 2020). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2240825 or http://dx.doi.org/10.2139/ssrn.2240825

Stefan Ruenzi (Contact Author)

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

Michael Ungeheuer

Aalto University ( email )

P.O.Box 21210
Aalto, 00076
Finland

HOME PAGE: http://sites.google.com/site/ungeheuermichael/

Florian Weigert

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

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