Dynamics in Systematic Liquidity

Bjorn Hagstromer, Richard G. Anderson, Jane Binner () and Birger Nilsson ()
Additional contact information
Jane Binner: Aston Business School, Postal: Aston University, Aston Triangle, Birmingham, B4 7ET, England, http://www.abs.aston.ac.uk/newweb/staff/detail.asp?sfldStaffID=A0000477
Birger Nilsson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden, http://www.nek.lu.se/nekbni/

No 2009:7, Working Papers from Lund University, Department of Economics

Abstract: We develop the principal component analysis (PCA) approach to systematic liquidity measurement by introducing moving and expanding estimation windows. We evaluatethese methods along with traditional estimation techniques (full sample PCA and market average) in terms of ability to explain (1) cross-sectional stock liquidity and (2) cross-sectional stock returns. For several traditional liquidity measures our results suggest an expanding window specification for systematic liquidity estimation. However, for price impact liquidity measures we find support for a moving window specification. The market average proxy of systematic liquidity produces the same degree of commonality, but does not have the same ability to explain stock returns as the PCA-based estimates.

Keywords: systematic liquidity; market liquidity; commonality; dynamic principal component analysis; robust PCA (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2009-05-25
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Working Paper: Dynamics in systematic liquidity (2009)
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