Topic
Liquidity premium
About: Liquidity premium is a research topic. Over the lifetime, 3215 publications have been published within this topic receiving 96402 citations. The topic is also known as: Liquidity premium.
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TL;DR: In this article, the authors investigated whether marketwide liquidity is a state variable important for asset pricing and found that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity.
Abstract: This study investigates whether marketwide 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. From 1966 through 1999, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5 percent annually, adjusted for exposures to the market return as well as size, value, and momentum factors. Furthermore, a liquidity risk factor accounts for half of the profits to a momentum strategy over the same 34-year period.
4,048 citations
TL;DR: The authors comprehensively reexamine the performance of variables that have been suggested by the academic literature to be good predictors of the equity premium and find that by and large, these models have predicted poorly both in-sample and out-of-sample (OOS) for 30 years now.
Abstract: Our article comprehensively reexamines the performance of variables that have been suggested by the academic literature to be good predictors of the equity premium. We find that by and large, these models have predicted poorly both in-sample (IS) and out-of-sample (OOS) for 30 years now; these models seem unstable, as diagnosed by their out-of-sample predictions and other statistics; and these models would not have helped an investor with access only to available information to profitably time the market.
3,339 citations
TL;DR: In this paper, a simple equilibrium model with liquidity risk is proposed, where 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.
2,020 citations
TL;DR: In this article, a wider-angle lens exposes an imposing image of commonality in market microstructure, showing that quoted spreads, quoted depth, and effective spreads co-move with market and industry-wide liquidity.
Abstract: Traditionally and understandably, the microscope of market microstructure has focused on attributes of single assets. Little theoretical attention and virtually no empirical work has been devoted to common determinants of liquidity nor to their empirical manifestation, correlated movements in liquidity. But a wider-angle lens exposes an imposing image of commonality. Quoted spreads, quoted depth, and effective spreads co-move with market- and industry-wide liquidity. After controlling for well-known individual liquidity determinants such as volatility, volume, and price, common influences remain significant and material. Recognizing the existence of commonality is a key to uncovering some suggestive evidence that inventory risks and asymmetric information both affect intertemporal changes in liquidity.
1,410 citations
TL;DR: The authors provided an alternative test of Amihud and Mendelson's (1986, Journal of Financial Economics, 8, 31, 31-35) model using the turnover rate (number of shares traded as a fraction of the number of shares outstanding) as a proxy for liquidity.
1,271 citations