Liquidity components: Commonality in liquidity, underreaction, and equity returns

Baris Ince

Journal of Financial Markets, 2022, vol. 60, issue C

Abstract: I decompose firm-specific monthly-varying illiquidity into three components: (i) alpha, (ii) systematic, and (iii) idiosyncratic. Investors demand a premium to hold stocks with high systematic illiquidity. However, the systematic illiquidity premium disappears when very small stocks are excluded. On the other hand, investors tend to underreact to idiosyncratic (il)liquidity. Hence, stocks with high (low) idiosyncratic liquidity generate positive (negative) future risk-adjusted returns. More specifically, stocks in the highest idiosyncratic liquidity quintile generate 7% more annualized risk-adjusted return compared to stocks in the lowest idiosyncratic liquidity quintile.

Keywords: Illiquidity; Idiosyncratic liquidity; Commonality in liquidity; Underreaction; Cross-section of returns (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:60:y:2022:i:c:s1386418122000234

DOI: 10.1016/j.finmar.2022.100730

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