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What captures liquidity risk? A comparison of trade and order based liquidity factors

Lorán Chollete (), Randi Næs and Johannes Skjeltorp
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Lorán Chollete: Norwegian School of Economics and Business

No 2007/03, Working Paper from Norges Bank

Abstract: Is the effect of liquidity risk on asset prices sensitive to our choice of liquidity proxy? In addressing this fundamental question, we achieve two main results. First, when we estimate factor models on a broad range of liquidity measures we uncover a profound distinction between trade and order based liquidity. Second, although the order based factor provides a better signal of available liquidity, we find that only the factor related to information risk explains expected returns both in a theoretical liquidity-CAPM model and in a linear pricing framework. Our results suggest a surprising fragility of liquidity-based asset pricing.

Keywords: CPAM; Liquidity risk; Liquidity factor; Order based measure; Trade based measure; Information risk (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2007-06-28
New Economics Papers: this item is included in nep-cfn, nep-mst, nep-rmg and nep-upt
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