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 language | English (US) |
|---|---|
| Title of host publication | Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning (In 4 Volumes) |
| Publisher | World Scientific Publishing Co. |
| Pages | 4119-4148 |
| Number of pages | 30 |
| ISBN (Electronic) | 9789811202391 |
| ISBN (Print) | 9789811202384 |
| DOIs | |
| State | Published - Jan 1 2020 |
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
- General Economics, Econometrics and Finance
- General Business, Management and Accounting