Liquidity Risk and Expected Stock Returns

Robert Stambaugh and Pástor, Luboš
Authors registered in the RePEc Author Service: Lubos Pastor

No 3494, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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, relies on the principle that order flow induces greater return reversals when liquidity is lower. 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.

Keywords: Asset pricing; Liquidity risk; Expected returns (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2002-08
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Liquidity Risk and Expected Stock Returns (2003)
Working Paper: Liquidity Risk and Expected Stock Returns (2001)
Working Paper: Liquidity Risk and Expected Stock Returns
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