Review of Financial Studies Vol. 21 No. 6 2008
Time-Varying Liquidity Risk and the Cross Section of Stock Returns
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.]
- Volume
- 21
- Issue
- 6
- Pages
- 2449-2486
- Sources
- bibtex:phds-export.bib