Jeffrey Pontiff and
Critical Finance Review, 2019, vol. 8, issue 1-2, 257-276
We revisit the role of liquidity risk. We successfully replicate Pastor and Stambaughâ€™s (2003) gamma liquidity risk index, and within their time period, concur with their risk premium estimate. An out-of-their-time-period analysis finds post-time-period returns that are higher and pre-time-period returns that are lower than in-time-period returns. Modest variations to the index that are intended to improve powerâ€”such as value weighting, including zero volume days, including all stock price levels, and a modification intended to reduce estimation errorâ€”all cast doubt on whether the gamma premium is compensation for liquidity risk. We create five alternative liquidity risk indices from various popular liquidity proxies. Using time-series that start in either 1932 or 1968, none of the 10 specifications produce statistically significant risk premia.
Keywords: Liquidity; Risk; Factor model; Replication (search for similar items in EconPapers)
JEL-codes: G00 G14 L3 C1 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000075
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