Journal of Financial Markets Vol. 60 2022
Liquidity components: Commonality in liquidity, underreaction, and equity returns
open access
Abstract
I decompose firm-specific monthly-varying illiquidity into three components: (i) alpha, (ii) systematic, and (iii) idiosyncratic. Investors demand a premium to hold stocks with high systematic illiquidity. However, the systematic illiquidity premium disappears when very small stocks are excluded. On the other hand, investors tend to underreact to idiosyncratic (il)liquidity. Hence, stocks with high (low) idiosyncratic liquidity generate positive (negative) future risk-adjusted returns. More specifically, stocks in the highest idiosyncratic liquidity quintile generate 7% more annualized risk-adjusted return compared to stocks in the lowest idiosyncratic liquidity quintile.
- DOI
- 10.1016/j.finmar.2022.100730
- Volume
- 60
- Pages
- 100730
- Language
- en
- Sources
- crossref openalex