 Asset pricing anomalies: Liquidity risk hedgers or liquidity risk spreaders?Nader Shahzad Virk and Hilal Anwar Butt International Review of Financial Analysis, 2022, vol. 81, issue C Abstract: We capture two distinct investing preferences – hedging against aggregate liquidity risk or betting on it – in the cross-section of stock returns. A three-factor model underpinned by exposures to changes in market liquidity, isolating two alternating patterns, is developed. Our results can be summarized in the following ways: one, the improved performance of recent asset-pricing models is driven by factors that mimic liquidity risk hedging and are linked to cross-sectional mispricing. Two, our model outperforms competing models in explaining time-series return variation across market states. Three, our parsimonious model enables an understanding of diverging return premia in the cross-section. Four, the estimated risk premiums in our model correspond to theoretical, economic, and statistical restrictions holistically across varied and complex anomaly structures. In this respect, the performance of the proposed model is even better than the risk premiums on factors in the model that have the largest cross-sectional r-squared values. Keywords: Risk; Mispricing; Aggregate liquidity-risk; Asset-pricing models; Estimated risk premium (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:81:y:2022:i:c:s1057521922000746 DOI: 10.1016/j.irfa.2022.102104 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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