Pricing liquidity in the stock market

Ding Du, Ou Hu

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

In this study, we aim to test the pricing power of market liquidity in the cross-section of US stock returns. We examine three liquidity measures: Pástor and Stambaugh (2003)‘s liquidity factor, Bali et al. (2014)‘s liquidity shocks, and Dreshsler, Savov, and Schanbl (2017)‘s money market liquidity premium. With a large set of test assets and the timeseries regression approach of Fama and French (2015), we find that aggregate liquidity is not priced in the cross-sections of stock returns. That is, adding the liquidity factor to common asset-pricing models does not improve the performance of models significantly. Therefore, our results call for more research on the impact of aggregate liquidity on the stock market.

Original languageEnglish (US)
Title of host publicationHandbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning (In 4 Volumes)
PublisherWorld Scientific Publishing Co.
Pages4119-4148
Number of pages30
ISBN (Electronic)9789811202391
ISBN (Print)9789811202384
DOIs
StatePublished - Jan 1 2020
Externally publishedYes

Keywords

  • Book-to-market
  • Crosssection of stock returns
  • Fama and french factor models
  • Industry portfolios
  • Investment
  • Liquidity shocks
  • Momentum
  • Money market liquidity premium
  • Operating profitability
  • Size
  • Stock market liquidity
  • Time-series regression

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)

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