Liquidity Risk And Expected Stock Returns Pdf
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The purpose of this study is to systematically review and analyze the literature in the area of liquidity of financial markets. The study summarizes the key findings and approaches and highlights the research gaps in the extant literature. A variety of reputed databases are utilized to select research papers, from a large pool of nearly 3, research papers spanning between and using systematic literature review methodology.
Liquidity Risk and Expected Stock Returns
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 through , the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7. Furthermore, a liquidity risk factor accounts for half of the profits to a momentum strategy over the same year period. Is your work missing from RePEc?
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This study investigates whether market-wide 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. Over a year period, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7. Download Citation Data. Pastor, Lubos and Robert F.
Liquidity of financial markets: a review
The role of liquidity in asset pricing: the special case of the Portuguese Stock Market. The unique setting of the Lisbon Stock Exchange with regards to changes in classification from an emerging to a developed stock market, allows an original answer to whether changes in the development of the market affect the role of liquidity in asset pricing. In contrast to prior research for major stock markets, they use the proportion of zero returns which is an appropriated measure of liquidity in tiny markets and propose the separated effects of illiquidity in a capital asset pricing model framework over the whole sample period as well as in two sub-samples, depending on the change in classification of the Portuguese market, from an emerging to a developed one. However, in contrast to previous evidence from other markets, they show that the most traded stocks hence the most liquid stocks exhibit larger returns. In addition, they show that the illiquidity effects on stock returns were higher and more significant in the period from January to November , during which the Portuguese stock market was still an emerging market. Additionally, these findings are a challenge for academics because they exhibit the need for providing alternative theories for tiny markets such as the Portuguese one.
Liquidity risk and expected stock returns. Lubos Pastor; Robert F Stambaugh. The Journal of Political Economy; Jun ; , 3; ABI/INFORM Global pg. .
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