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Time-Varying Liquidity Risk and the Cross Section of Stock Returns

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Author Info
Akiko Watanabe
Masahiro Watanabe
Abstract

This paper studies whether stock returns' sensitivities to aggregate liquidity fluctuations and the pricing of liquidity risk vary over time. We find that liquidity betas vary across two distinct states: one with high liquidity betas and the other with low betas. The high liquidity-beta state is short lived and characterized by heavy trade, high volatility, and a wide cross-sectional dispersion in liquidity betas. It also delivers a disproportionately large liquidity risk premium, amounting to more than twice the value premium. Our results are consistent with a model of liquidity risk in which investors face uncertainty about their trading counterparties' preferences. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhm054
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 21 (2008)
Issue (Month): 6 (November)
Pages: 2449-2486
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:oup:rfinst:v:21:y:2008:i:6:p:2449-2486

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  1. Söderberg, Jonas, 2008. "Do Macroeconomic Variables Forecast Changes in Liquidity? An Out-of-sample Study on the Order-driven Stock Markets in Scandinavia," CAFO Working Papers 2009:10, Centre for Labour Market Policy Research (CAFO), School of Management and Economics, Växjö University. [Downloadable!]
  2. Söderberg, Jonas, 2008. "Liquidity on the Scandinavian Order-driven Stock Exchanges," CAFO Working Papers 2009:11, Centre for Labour Market Policy Research (CAFO), School of Management and Economics, Växjö University. [Downloadable!]
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This page was last updated on 2009-10-23.

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