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Asset pricing and systematic liquidity risk: an empirical investigation of the Spanish stock market

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  • Rubio Irigoyen, Gonzalo
  • Martínez Sedano, Miguel Ángel
  • Nieto, Belén

Abstract

Systematic liquidity shocks should affect the optimal behavior of agents in financial markets. Indeed, fluctuations in various measures of liquidity are significantly correlated across common stocks. Accordingly, this paper empirically analyzes whether Spanish average returns vary cross-sectionally with betas estimated relative to two competing liquidity risk factors. The first one, proposed by Pastor and Stambaugh (2002), is associated with the strength of volume-related return reversals. Our marketwide liquidity factor is defined as the difference between returns highly sensitive to changes in the relative bid-ask spread and returns with low sensitivities to those changes. Our empirical results show that neither of these proxies for systematic liquidity risk seems to be priced in the Spanish stock market. Further international evidence is deserved.

Suggested Citation

  • Rubio Irigoyen, Gonzalo & Martínez Sedano, Miguel Ángel & Nieto, Belén, 2002. "Asset pricing and systematic liquidity risk: an empirical investigation of the Spanish stock market," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    • Handle: RePEc:ehu:dfaeii:6758
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    Cited by:

    1. Yuanyuan Xu & Chongguang Li, 2018. "Liquidity of the Chinese Agricultural Futures Market and Its Impact on Futures Price—Based on High-Frequency Data," Sustainability, MDPI, vol. 10(12), pages 1-18, December.

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    More about this item

    Keywords

    systematic liquidity risk; expected returns; bid ask spread; order flow;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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