The Risk Components of Liquidity

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/Default.aspx?ID=2016

No 2008/7, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: Does liquidity risk differ depending on our choice of liquidity proxy? Unlike literature that considers common liquidity variation, we focus on identifying different components of liquidity, statistically and economically, using more than a decade of US transaction data. We identify three main statistical liquidity factors which are utilized in a linear asset pricing framework. We motivate a correspondence of the statistical factors to traditional dimensions of liquidity as well as the notion of order and trade based liquidity measures. We find evidence of multiple liquidity risk premia, but only a subset of the financial liquidity factors are associated with significant risk premia. These are the factors that we relate to the dimensions of immediacy and resilliency, while the depth dimension does not command a risk premium in any of the models. Our results suggests caution when choosing liquidity variables in asset pricing applications, since liquidity premia may be reflected in only some dimensions of liquidity.

Keywords: Liquidity Risk; Liquidity Factors; Asset Pricing; Market Microstructure (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2008-03-12
New Economics Papers: this item is included in nep-cfn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: The risk components of liquidity (2008)
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