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 ret...
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| Format: | text |
| Language: | English |
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Institutional Knowledge at Singapore Management University
2012
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| Online Access: | https://ink.library.smu.edu.sg/lkcsb_research/3267 |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | 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. |
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