Liquidity Commonality and its Pricing: Evidence from Firms in Supply Chain Networks

83 Pages Posted: 9 Nov 2020 Last revised: 15 Mar 2021

See all articles by Byungjin Hong

Byungjin Hong

McGill University - Desautels Faculty of Management

Date Written: October 24, 2020

Abstract

This paper investigates how economic links from customer-supplier relationships affect liquidity commonality and its pricing. I show that a stock's liquidity co-moves with liquidity of its economically linked stocks and this liquidity commonality decreases with the level of information asymmetry on the stock. A long-short portfolio from the high-minus-low liquidity commonality with economically linked firms yields economically and statistically significant average returns, and these returns cannot be explained by majorly known systematic risk factors. The results imply that supply-chain networks are another important channel for liquidity risk.

Keywords: Liquidity Synchronization, Liquidity Risk Premium, Economic Linkage

JEL Classification: G10, G12, L14

Suggested Citation

Hong, Byungjin, Liquidity Commonality and its Pricing: Evidence from Firms in Supply Chain Networks (October 24, 2020). Available at SSRN: https://ssrn.com/abstract=3709422 or http://dx.doi.org/10.2139/ssrn.3709422

Byungjin Hong (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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