Liquidity Risk and Stock Returns Around the World

48 Pages Posted: 17 Feb 2005 Last revised: 15 Jan 2015

See all articles by Samuel Xin Liang

Samuel Xin Liang

Ryerson University

K.C. John Wei

Hong Kong Polytechnic University

Date Written: May 30, 2012

Abstract

The recent global financial crisis demonstrates that market liquidity is a prominent systematic risk globally. We find that local liquidity risk, in addition to the local market, value and size factors, demands a systematic premium across stocks in 11 developed markets. This local pricing premium is smaller in countries where the country-level corporate boards are more effective and where there are less insider trading activities. We also discover that global liquidity risk is a significant pricing factor across all developed country market portfolios after controlling for global market, value, and size factors. The contribution of this risk to the return on a country market portfolio is economically and statistically significant within and across regions.

Keywords: Liquidity risk, Risk premium, International markets

JEL Classification: G11, G12, G15

Suggested Citation

Liang, Samuel Xin and Wei, Kuo-Chiang (John), Liquidity Risk and Stock Returns Around the World (May 30, 2012). Journal of Banking and Finance, 2012, Vol. 36, No. 12, pp. 3274-3288, Available at SSRN: https://ssrn.com/abstract=652961 or http://dx.doi.org/10.2139/ssrn.652961

Samuel Xin Liang (Contact Author)

Ryerson University ( email )

55 Dundas St W,
Toronto, Ontario M5G 2C3
Canada

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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