Liquidity Commonality and its Pricing: Evidence from Firms in Supply Chain Networks
83 Pages Posted: 9 Nov 2020 Last revised: 15 Mar 2021
Date Written: October 24, 2020
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
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