Does Commonality in Illiquidity Command a Risk Premium?

36 Pages Posted: 23 Jun 2013 Last revised: 4 Jan 2017

See all articles by Richard G. Anderson

Richard G. Anderson

Federal Reserve Bank of St. Louis - Research Division

Jane M. Binner

University of Birmingham - Department of Accounting and Finance

Björn Hagströmer

Stockholm University - Stockholm Business School

Birger Nilsson

Lund University - Department of Economics

Date Written: December 31, 2016

Abstract

This paper investigates whether investors are compensated for taking on commonality risk in equity portfolios. A large literature documents the existence and the causes of commonality in illiquidity, but the implications for investors are less understood. In a more than fifty year long sample of NYSE stocks, we find that commonality risk carries a return premium of at least 2.0 per cent annually. The commonality risk premium is statistically and economically significant, and substantially higher than what is found in previous studies. It is robust when controlling for illiquidity level effects, transaction costs, as well as variations in illiquidity measurement.

Keywords: commonality, commonality risk premium, asset illiquidity, systematic illiquidity, liquidity, effective tick

JEL Classification: G11, G12

Suggested Citation

Anderson, Richard G. and Binner, Jane M. and Hagströmer, Björn and Nilsson, Birger, Does Commonality in Illiquidity Command a Risk Premium? (December 31, 2016). Available at SSRN: https://ssrn.com/abstract=2281459 or http://dx.doi.org/10.2139/ssrn.2281459

Richard G. Anderson (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Jane M. Binner

University of Birmingham - Department of Accounting and Finance ( email )

Birmingham, B15 2TY
United Kingdom

Björn Hagströmer

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

Birger Nilsson

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden

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