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The risk components of liquidity

Author

Listed:
  • Lorán Chollete

    (Norwegian School of Economics and Business (NHH) and Norges Bank (Central Bank of Norway))

  • Randi Næs

    (Norges Bank (Central Bank of Norway))

  • Johannes A. Skjeltorp

    (Norges Bank (Central Bank of Norway))

Abstract

Does liquidity risk differ depending on our choice of liquidity proxy? Unlike literature that considers common liquidity variation, we focus on identifying different components of liquidity, statistically and economically, using more than a decade of US transaction data. We identify three main statistical liquidity factors which are utilized in a linear asset pricing framework. We motivate a correspondence of the statistical factors to traditional dimensions of liquidity as well as the notion of order and trade based liquidity measures. We find evidence of multiple liquidity risk premia, but only a subset of the financial liquidity factors are associated with significant risk premia. These are the factors that we relate to the dimensions of immediacy and resilliency, while the depth dimension does not command a risk premium in any of the models. Our results suggests caution when choosing liquidity variables in asset pricing applications, since liquidity premia may be reflected in only some dimensions of liquidity.

Suggested Citation

  • Lorán Chollete & Randi Næs & Johannes A. Skjeltorp, 2008. "The risk components of liquidity," Working Paper 2008/03, Norges Bank.
    • Handle: RePEc:bno:worpap:2008_03
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    File URL: https://www.norges-bank.no/en/news-events/news-publications/Papers/Working-Papers/2008/WP-20083/
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    References listed on IDEAS

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    Cited by:

    1. Rakkestad, Ketil & Skjeltorp, Johannes & Ødegaard, Bernt Arne, 2012. "The liquidity of the Secondary Market for Debt Securities in Norway," UiS Working Papers in Economics and Finance 2012/12, University of Stavanger.
    2. Hagströmer, Björn & Anderson, Richard G. & Binner, Jane & Nilsson, Birger, 2009. "Dynamics in Systematic Liquidity," Working Papers 2009:7, Lund University, Department of Economics.
    3. Syeda Hina Zaidi & Nousheen Tariq Bhutta, 2021. "Liquidity Synchronization and Asset Valuation in Selected Emerging Asian Economies," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(6), pages 488-500, June.
    4. Zhang, Tianyang & Lence, Sergio H., 2022. "Liquidity and asset pricing: Evidence from the Chinese stock markets," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).

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    More about this item

    Keywords

    Liquidity risk; Liquidity factors; Asset pricing; Market microstructure;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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