Liquidity Risk?

34 Pages Posted: 24 Jan 2019 Last revised: 15 Feb 2019

See all articles by Jeffrey Pontiff

Jeffrey Pontiff

Boston College - Department of Finance

Rohit Singla

University of Michigan, Stephen M. Ross School of Business

Date Written: February 5, 2019

Abstract

We revisit the role of liquidity risk. We successfully replicate Pastor and Stambaugh’s (2003) gamma liquidity risk index and, within their time period, concur with their risk premium estimate. An out-of-their-time-period analysis finds post-time-period returns that are higher and pre-time-period returns that are lower than in-time-period returns. Modest variations to the index that are intended to improve power—such as value weighting, including zero volume days, including all stock price levels, and a modification intended to reduce estimation error—all cast doubt on whether the gamma premium is compensation for liquidity risk. We create five alternative liquidity risk indices from various popular liquidity proxies. Using time-series that start in either 1932 or 1968, none of the ten specifications produce statistically significant risk premia.

Keywords: Liquidity, Risk, Factor Model, Replication

JEL Classification: G00, G14, L3, C1

Suggested Citation

Pontiff, Jeffrey and Singla, Rohit, Liquidity Risk? (February 5, 2019). Available at SSRN: https://ssrn.com/abstract=3320011 or http://dx.doi.org/10.2139/ssrn.3320011

Jeffrey Pontiff (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Rohit Singla

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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