TY - JOUR
T1 - Asset pricing with extreme liquidity risk
AU - Wu, Ying
N1 - Publisher Copyright:
© 2019 Elsevier B.V.
PY - 2019/12
Y1 - 2019/12
N2 - Defining extreme liquidity as the tail of the illiquidity for all stocks, I propose a direct measure of market-wide extreme liquidity risk and find that it is priced cross-sectionally in the U.S. Between 1973 and 2014, the stocks with high extreme liquidity risk beta earned value-weighted average return of 5.88% annually higher than the stocks with low extreme liquidity risk beta, adjusted for the illiquidity level premium and exposures to aggregate liquidity risk as well as the market, size and value factors. The extreme liquidity risk premium is different from that on aggregate liquidity risk documented in Pástor and Stambaugh (2003) as well as that based on the tail risk in return of Kelly and Jiang (2014). Extreme liquidity risk provides an advance warning about extreme liquidity events. I explore potential economic mechanisms through which the rare and large fluctuations in stock-level liquidity are priced.
AB - Defining extreme liquidity as the tail of the illiquidity for all stocks, I propose a direct measure of market-wide extreme liquidity risk and find that it is priced cross-sectionally in the U.S. Between 1973 and 2014, the stocks with high extreme liquidity risk beta earned value-weighted average return of 5.88% annually higher than the stocks with low extreme liquidity risk beta, adjusted for the illiquidity level premium and exposures to aggregate liquidity risk as well as the market, size and value factors. The extreme liquidity risk premium is different from that on aggregate liquidity risk documented in Pástor and Stambaugh (2003) as well as that based on the tail risk in return of Kelly and Jiang (2014). Extreme liquidity risk provides an advance warning about extreme liquidity events. I explore potential economic mechanisms through which the rare and large fluctuations in stock-level liquidity are priced.
KW - Asset pricing
KW - Cross section of returns
KW - Extreme liquidity risk
UR - http://www.scopus.com/inward/record.url?scp=85072866654&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85072866654&partnerID=8YFLogxK
U2 - 10.1016/j.jempfin.2019.09.002
DO - 10.1016/j.jempfin.2019.09.002
M3 - Article
AN - SCOPUS:85072866654
SN - 0927-5398
VL - 54
SP - 143
EP - 165
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
ER -