The Divergence of Liquidity Commonality in the Cross-Section of Stocks

52 Pages Posted: 9 Nov 2006  

Avraham Kamara

University of Washington - Michael G. Foster School of Business

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics

Ronnie Sadka

Boston College - Carroll School of Management

Date Written: July 15, 2007

Abstract

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

Kamara, Avraham and Lou, Xiaoxia and Sadka, Ronnie, The Divergence of Liquidity Commonality in the Cross-Section of Stocks (July 15, 2007). Available at SSRN: https://ssrn.com/abstract=943040 or http://dx.doi.org/10.2139/ssrn.943040

Avraham Kamara

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543-0652 (Phone)
206-221-6856 (Fax)

Xiaoxia Lou (Contact Author)

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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