Liquidity Risk and Expected Stock Returns

38 Pages Posted: 10 Sep 2001 Last revised: 17 Aug 2022

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2001

Abstract

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

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

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Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

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