Liquidity Level or Liquidity Risk? A Fresh Look with New Measures
Spanish Journal of Finance and Accounting, Forthcoming
24 Pages Posted: 29 Jan 2021
Date Written: August 15, 2020
Lou and Sadka (2011) examine the effect of stock liquidity characteristics on stock performance during the 2008-2009 crisis. Their conclusion is that liquidity risk, and not the liquidity level, explains stock performance during the crisis. Lou and Sadka (2011) measure liquidity via Amihud’s (2002) illiquidity measure. I construct a new measure of illiquidity, based on transaction-by-transaction price changes and conduct a similar analysis to that in Lou and Sadka. My findings show that, controlling for liquidity risk, the level of liquidity has incremental explanatory power for stock performance during the crisis. My analysis suggests that the level of liquidity and liquidity risk are both important facets of stock liquidity and that there might be an interaction or overlap between the two.
Keywords: Asset Pricing, Liquidity, Financial Crisis
JEL Classification: G12, G14
Suggested Citation: Suggested Citation