Pricing Implications of Shared Variance in Liquidity Measures

Lorán Chollete (), Randi Næs and Johannes Skjeltorp
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Lorán Chollete: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway, http://www.nhh.no/for/cv/chollete-loran.htm

No 2006/9, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: Is the effect of liquidity risk on asset prices sensitive to our choice of liquidity proxy? In addressing this fundamental question, we achieve two main results. First, when we estimate factor models on a broad range of liquidity measures we uncover a profound distinction between trade and order based liquidity. Second, although the order based factor provides a better signal of available liquidity, we find that only the factor related to information risk explains expected returns both in a theoretical liquidity-CAPM model and in a linear pricing framework. Our results suggest a surprising fragility of liquidity-based asset pricing.

Keywords: CAPM; Liquidity Risk; Liquidity Factor; Order Based Measure; Trade Based Measure; Information Risk (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2006-08-04, Revised 2007-06-21
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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