Extreme Downside Liquidity Risk

78 Pages Posted: 1 Apr 2013 Last revised: 12 Mar 2018

Stefan Ruenzi

University of Mannheim - Department of International Finance

Michael Ungeheuer

Aalto University School of Business

Florian Weigert

University of St. Gallen - School of Finance

Date Written: March 8, 2018

Abstract

We merge the literature on downside return risk with that on systematic liquidity risk and introduce the concept of extreme downside liquidity (EDL) risk. We show that the cross-section of expected stock returns reflects a premium for EDL risk. Strong EDL risk stocks deliver a positive risk premium of more than 4% p.a. as compared to weak EDL risk stocks. The effect is more pronounced after the market crash of 1987. It is not driven by linear liquidity risk or by extreme downside return risk, and it cannot be explained by other firm characteristics or other systematic risk factors.

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, Extreme Downside Liquidity Risk (March 8, 2018). 26th Australasian Finance and Banking Conference 2013; University of St.Gallen, School of Finance Research Paper No. 2013/26. 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 School of Business ( email )

P.O.Box 21220
Helsinki, 00076
Finland

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

Florian Weigert

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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