The Divergence of Liquidity Commonality in the Cross-Section of Stocks
52 Pages Posted: 9 Nov 2006
Date Written: July 15, 2007
This paper demonstrates that the cross-sectional variation of liquidity commonality has increased over the period 1963-2005. The divergence of systematic liquidity can be explained by patterns in institutional ownership over the sample period. We document that our findings are associated with similar patterns in systematic risk, and have significant implications for expected returns. Our analysis also indicates that the ability to diversify systematic risk and aggregate liquidity shocks by holding large-cap stocks has declined. The evidence, therefore, suggests that the fragility of the US equity market to unanticipated events has increased over the past few decades.
Keywords: systematic liquidity, systematic risk, institutional investors, diversification
JEL Classification: G11, G14
Suggested Citation: Suggested Citation