Higher-moment liquidity risks and the cross-section of stock returns

Soonho Kim and Haejung Na

Journal of Financial Markets, 2018, vol. 38, issue C, 39-59

Abstract: In this paper, we derive higher-moment liquidity risks theoretically and examine whether they are empirically priced. We discover that when investors add trading cost to the utility function, the expected return of a stock should contain premia related to three higher-moment liquidity risks. We show that one of our higher-moment liquidity risks, or liquidity coskewness risk, measures an individual stock's marginal contribution to the skewness of portfolio liquidity and is consistently priced. In addition, our analysis of the Hansen-Jagannathan distance and the maximum Sharpe ratio show that the liquidity coskewness risk plays a substantial role in asset pricing and portfolio management.

Keywords: Asset pricing; Liquidity risk; Higher-moment liquidity risks (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:38:y:2018:i:c:p:39-59

DOI: 10.1016/j.finmar.2017.10.001

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