Liquidity Variation and the Cross-Section of Stock Returns
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.
Liquidity, Time-varying liquidity, Cross-sectional stock returns
Finance and Financial Management
Five Star Forum in Finance, Hanqing Advanced Institute of Economics and Finance, Renmin University, Beijing, China, June 2012
City or Country
Liquidity Variation and the Cross-Section of Stock Returns. (2012). Five Star Forum in Finance, Hanqing Advanced Institute of Economics and Finance, Renmin University, Beijing, China, June 2012. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3267