Title

Liquidity Variation and the Cross-Section of Stock Returns

Publication Type

Conference Paper

Publication Date

6-2012

Abstract

Stock liquidity varies substantially over time. A significant decrease in liquidity is often followed by a sizable rebound, and vice versa. The month-to-month liquidity change predicts the cross-sectional stock returns in the following month. Caeteris paribus, a liquidity decrease predicts a low return and a liquidity increase predicts a high return. The results are not explained by other cross-sectional return determinants including the liquidity level. The results are consistent with the mean-reverting nature of liquidity and its variation being priced. A liquidity reduction predicts an expected liquidity increase and thus a lower expected return, and vice versa. Our research suggests liquidity variation as an important factor of asset pricing. Its effect is independent from the widely documented liquidity level effect.

Keywords

Liquidity, Time-varying liquidity, Cross-sectional stock returns

Discipline

Finance and Financial Management

Research Areas

Finance

Publication

Five Star Forum in Finance, Hanqing Advanced Institute of Economics and Finance, Renmin University, Beijing, China, June 2012

City or Country

Beijing, China

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