38 Pages Posted: 10 Sep 2001
Date Written: September 2001
This study investigates whether market-wide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. Over a 34-year period, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5% annually, adjusted for exposures to the market return as well as size, value, and momentum factors.
Suggested Citation: Suggested Citation
Pastor, Lubos and Stambaugh, Robert F., Liquidity Risk and Expected Stock Returns (September 2001). NBER Working Paper No. w8462. Available at SSRN: https://ssrn.com/abstract=282688
By Andrew Ang