Liquidity Risk and Expected Stock Returns

Lubos Pastor and Robert Stambaugh

Journal of Political Economy, 2003, vol. 111, issue 3, 642-685

Abstract: This study investigates whether marketwide 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. From 1966 through 1999, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5 percent annually, adjusted for exposures to the market return as well as size, value, and momentum factors. Furthermore, a liquidity risk factor accounts for half of the profits to a momentum strategy over the same 34-year period.

Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1950)

Downloads: (external link)
http://dx.doi.org/10.1086/374184 main text (application/pdf)
Access to the online full text or PDF requires a subscription.

Related works:
Working Paper: Liquidity Risk and Expected Stock Returns (2002)
Working Paper: Liquidity Risk and Expected Stock Returns (2001)
Working Paper: Liquidity Risk and Expected Stock Returns
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:v:111:y:2003:i:3:p:642-685

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().