liquidity and the market return. We capture these lower tail dependencies with copulas and show that the cross-section of expected stock returns reflects a  Keywords: illiquidity risks, Fama-French model, liquidity-based model, multifactor model liquidity is an important driver of expected stock returns. Despite the  contribution to expected return (liquidity beta times the risk premium) is as much as 7.5% per year for stocks with high sensitivities to liquidity risk. However, this 

also show that the role of liquidity risk on expected stock returns is especially pronounced during the post-Asian financial crisis period. Keywords Asset pricing   Liquidity Risk and Expected Stock Returns - Chicago Journals www.journals.uchicago.edu/doi/abs/10.1086/374184 AbstractThis article examines the impact of various sources of systematic liquidity risk and idiosyncratic liquidity risk on expected returns in the Indian stock  of emerging equity market trading costs, and confirms the usefulness of this measure liquidity risk is priced and persistent, liquidity should predict future returns. 4 Jan 2016 Second, insofar as equity options are derived securities from the underlying stocks, empirical studies of option liquidity usually focus on the  stocks have higher sensitivity to liquidity risk in worst times than in best times, countercyclical nature of value-minus-growth expected returns.4 Overall, our  Amihud & Mendelson (1986) test the effects of illiquidity on stock returns and A negative relation is expected between this liquidity risk and expected return 

9 Jan 2015 liquidity crises. We find that market risk, measured by the market beta, is not a good measure of expected abnormal stock returns on days with 

between stock returns and the variability of liquidity, where liquidity is proxied by measures of trading activity such as volume and turnover. The authors report that stocks with more volatile liquidity have lower expected returns, an unexpected result. Liquidity risk in that study is measured as ¯rm-speci¯c variability in liquidity. Over a 34-year period, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5% annually, adjusted for exposures to the market return as well as size, value, and momentum factors. Liquidity Risk and Expected Stock Returns Abstract This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross‐sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Abstract. This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, A unified explanation of risk and mispricing in stock returns underpinned by their aggregate liquidity risk is presented. We argue alternating liquidity exposures depict two distinct investment This study investigates whether market-wide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, liquidity risk 643 I. Introduction In standard asset pricing theory, expected stock returns are related cross-sectionally to returns’ sensitivities to state variables with pervasive effects on investors’ overall welfare. A security whose lowest returns tend to accompany unfavorable shifts in that welfare must offer additional com-

convincing evidence in favour of the liquidity risk premium on the Polish stock market. Keywords: Liquidity, Size Effect, Value Effect, Expected Stock Returns,  

Abstract. This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data,

Download Citation | Liquidity Risk and Expected Stock Returns | This study investigates whether marketwide liquidity is a state variable important for asset 

Abstract. This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, liquidity risk expected stock return stock return low sensitivity liquidity exceeds momentum factor order flow induces average return return reversal 34-year period asset pricing market-wide liquidity monthly liquidity measure daily data individual-stock measure aggregate liquidity market return high sensitivity. This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. liquidity risk 643 I. Introduction In standard asset pricing theory, expected stock returns are related cross-sectionally to returns’ sensitivities to state variables with pervasive effects on investors’ overall welfare. A security whose lowest returns tend to accompany unfavorable shifts in that welfare must offer additional com- of a stochastic liquidity cost, and expected returns are related to return covariances with the aggregate liquidity cost (as well as to three other covariances). LIQUIDITY RISK 643 Liquidity is characterized by a high level of trading activity and small spreads between the bid and offer. Because it's safer to invest in liquid securities than illiquid ones, illiquid assets should have higher expected returns (a risk premium) as compensation for their incremental risks and higher costs of trading. The investing trinity: risk, liquidity, and return. Investing can seem complicated, but it boils down to three basic principles. A money changer shows some one-hundred U.S. dollar bills at an exchange booth in Tokyo. According to Hamm, understanding investing starts with understanding risk, return, and available assets.

This paper introduces a coincident indicator of systemic liquidity risk in the It is calculated as the ratio of absolute returns on a stock (in the following Swaps ( CDS) premia and Moody's KMV Expected Default Frequencies (EDF) are used.

liquidity risk 643 I. Introduction In standard asset pricing theory, expected stock returns are related cross-sectionally to returns’ sensitivities to state variables with pervasive effects on investors’ overall welfare. A security whose lowest returns tend to accompany unfavorable shifts in that welfare must offer additional com- Liquidity risk and expected stock returns Lubos Pastor; Robert F Stambaugh The Journal of Political Economy; Jun 2003; 111, 3; ABI/INFORM Global pg. 642. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

4 Jan 2016 Second, insofar as equity options are derived securities from the underlying stocks, empirical studies of option liquidity usually focus on the  stocks have higher sensitivity to liquidity risk in worst times than in best times, countercyclical nature of value-minus-growth expected returns.4 Overall, our  Amihud & Mendelson (1986) test the effects of illiquidity on stock returns and A negative relation is expected between this liquidity risk and expected return  convincing evidence in favour of the liquidity risk premium on the Polish stock market. Keywords: Liquidity, Size Effect, Value Effect, Expected Stock Returns,   Keywords: Size effect, liquidity effect, stock returns. ∗We thank The mainstream asset pricing theory contends that the expected return of a secu- A difficulty in testing the liquidity-based explanation against the risk-based explanation. covariance of stock liquidity with the market return. The positive correlation between the volatility of liquidity and expected returns suggests that risk averse