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Liquidity Risk and Expected Stock Returns (2002)
| Citations: | 587 - 4 self |
BibTeX
@MISC{Pastor02liquidityrisk,
author = {Lubos Pastor and Robert F. Stambaugh},
title = {Liquidity Risk and Expected Stock Returns},
year = {2002}
}
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Abstract
This study investigates whether market-wide 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. Over a 34-year period, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5 % annually, adjusted for exposures to the market return as well as size, value, and momentum factors.
Keyphrases
liquidity risk expected stock return stock return low sensitivity liquidity exceeds momentum factor order flow induces average return return reversal 34-year period asset pricing market-wide liquidity monthly liquidity measure daily data individual-stock measure aggregate liquidity market return high sensitivity
