Liquidity and Liquidity Risk in the Cross-Section of Stock Returns

Volodymyr Vovchak
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Volodymyr Vovchak: Swiss Finance Institute

No 12-44, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper examines the relative importance of liquidity level and liquidity risk for the cross-section of stock returns. A portfolio analysis is implemented to make inferences about the pricing ability of liquidity as a characteristic or as a risk. I find that the ratio of absolute returns-to-volume, the Amihud liquidity measure, is able to explain more variance in stock returns than a battery of liquidity risk measures. My results suggest that trading cost and frictions impact financial markets more than the systemic components of liquidity.

Keywords: Liquidity; Liquidity risk; Asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-06
New Economics Papers: this item is included in nep-fmk and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1244

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