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Asset pricing and systematic liquidity risk: an empirical investigation of the Spanish stock market

Gonzalo Rubio Irigoyen, Miguel Martinez Sedano () and Belén Nieto

No 2002-05, DFAEII Working Papers from University of the Basque Country - Department of Foundations of Economic Analysis II

Abstract: Systematic liquidity shocks should affect the optimal behavior of agents in financial markets. Indeed, fluctuations in various measures of liquidity are significantly correlated across common stocks. Accordingly, this paper empirically analyzes whether Spanish average returns vary cross-sectionally with betas estimated relative to two competing liquidity risk factors. The first one, proposed by Pastor and Stambaugh (2002), is associated with the strength of volume-related return reversals. Our marketwide liquidity factor is defined as the difference between returns highly sensitive to changes in the relative bid-ask spread and returns with low sensitivities to those changes. Our empirical results show that neither of these proxies for systematic liquidity risk seems to be priced in the Spanish stock market. Further international evidence is deserved.

Keywords: systematic liquidity risk; expected returns; bid ask spread; order flow (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2002
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Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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