https://w4.stern.nyu.edu/finance/docs/WP/2000/pdf/wpa00041.pdf

Illiquidity and stock returns: cross-section and time-series effects $

New tests are presented on the effects of stock illiquidity on stock return. Over time, expected market illiquidity positively affects ex ante stock excess return (usually called â¬Srisk premiumâ¬?). This complements the positive cross-sectional return-illiquidity relationship. The illiquidity measure here is the average daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firms stocks, suggesting an explanation for the changes â¬Ssmall firm effectâ¬? over time. The impact of market illiquidity on stock excess return suggests the existence of illiquidity premium and helps explain the equity premium puzzle.

Illiquidity and Stock Returns: Cross-Section and Time-Series Effects

Market Liquidity: Illiquidity and Stock Returns Cross-Section and Time-Series Effects＊

We use the information in credit default swaps to obtain direct measures of the size of the default and nondefault components in corporate spreads. We find that the majority of the corporate spread is due to default risk. This result holds for all rating categories and is robust to the definition of the riskless curve. We also find that the nondefault component is time varying and strongly related to measures of bond-specific illiquidity as well as to macroeconomic measures of bond market liquidity.

/pdf/corporate-yield-spreads-default-risk-or-liquidity-new-1oqrwguyth.pdf

Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market

This paper solves explicitly a simple equilibrium model with liquidity risk. In our liquidityadjusted capital asset pricing model, a security s required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return and liquidity. In addition, a persistent negative shock to a security s liquidity results in low contemporaneous returns and high predicted future returns. The model provides a unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels and provide evidence of flight to liquidity. r 2005 Elsevier B.V. All rights reserved.

Market Liquidity: Asset Pricing with Liquidity Risk

This article investigates differences in yields on identical Treasury notes and bills and shows that they reflect differences in liquidity (immediacy) risk and taxes. It proposes an empirical measure for differences in the liquidity risk of notes and bills: the volatility ofthe underlying rate times the ratio of bills' turnover to notes' turnover. Because differential taxes affect sellers but not buyers of bills and notes, the results reject, free of informational problems, the hypothesis that the notes' demand curve is horizontal. Note-bill yield differences also decrease with inventories of notes?the less liquid asset.

Liquidity, Taxes, and Short-Term Treasury Yields

This paper demonstrates that the cross-sectional variation of liquidity commonality has increased over the period 1963-2005. The divergence of systematic liquidity can be explained by patterns in institutional ownership over the sample period. We document that our findings are associated with similar patterns in systematic risk, and have significant implications for expected returns. Our analysis also indicates that the ability to diversify systematic risk and aggregate liquidity shocks by holding large-cap stocks has declined. The evidence, therefore, suggests that the fragility of the US equity market to unanticipated events has increased over the past few decades.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1000838_code351211.pdf?abstractid=943040&rulid=5356127&mirid=1

The Divergence of Liquidity Commonality in the Cross-Section of Stocks

The divergence of liquidity commonality in the cross-section of stocks.

Equity derivatives and the institutionalization of equity markets affect the Monday seasonal. The seasonal in the Standard and Poor's 500 (S&P) declines significantly over 1962-93. This decline is positively related to the ratio of institutional to individual trading volume. In contrast, the seasonal for small stocks does not decline and is unaffected by institutional versus individual trading. Higher trading costs sustain the seasonal in small stocks and, unlike the S&P, these costs are not lower for institutions than for individuals. Futures minus spot S&P returns exhibit a reverse seasonal. Informed traders use the less costly market to exploit the seasonal. Copyright 1997 by University of Chicago Press.

New Evidence on the Monday Seasonal in Stock Returns

Existing empirical studies of the put-call parity condition report frequent, substantial violations. An important problem in interpreting these results is that these studies all investigate American options. While some of these studies attempt to reduce the effects of possible early exercise on their tests, they cannot fully account for the effect of early exercise. Therefore, it is not possible to conclude from these studies whether, or to what extent, observed put-call parity violations are due to market inefficiency or due to the value of early exercise. We avoid the early exercise problem by testing put-call parity using European options. We find violations that are much less frequent and smaller than the studies using American options. Moreover, these violations reflect premia for liquidity

Avraham Kamara

Papers

Liquidity, Taxes, and Short-Term Treasury Yields

The Divergence of Liquidity Commonality in the Cross-Section of Stocks

The divergence of liquidity commonality in the cross-section of stocks.

New Evidence on the Monday Seasonal in Stock Returns

Daily and Intradaily Tests of European Put-Call