How do volatility regimes affect the pricing of quality and liquidity in the stock market?

Tarik Bazgour, Cédric Heuchenne, Georges Hübner and Danielle Sougné
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Cédric Heuchenne: Université catholique de Louvain, LIDAM/ISBA, Belgium

No 2021038, LIDAM Reprints ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)

Abstract: This paper shows how stock market volatility regimes affect the cross-section of stock returns along quality and liquidity dimensions. We find that, during crisis periods, low quality and low liquidity stocks experience relatively higher losses than predicted in normal times, while high quality and high liquidity stocks experience rather relatively lower losses. These findings lend strong support to the presence of cross-market and within-market flight-to-quality and to-liquidity episodes during crisis periods. During low volatility periods, however, low quality and low liquidity stocks earn relatively larger returns, while high quality and high liquidity stocks yield lower returns; suggesting that low volatility conditions benefit junk and illiquid stocks but not quality and liquid stocks. Finally, our results reveal that liquidity level dominates liquidity beta in explaining stock returns across the different market volatility regimes.

Keywords: Financial crises; liquidity; liquidity risk; quality; volatility regimes (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Pages: 30
Date: 2021-01-01
Note: In: Studies in Nonlinear Dynamics & Econometrics, 2021, vol. 25(1), p. 20180127
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Journal Article: How do volatility regimes affect the pricing of quality and liquidity in the stock market? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:aiz:louvar:2021038

DOI: 10.1515/snde-2018-0127

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