The volatility of liquidity and expected stock returns
This study shows that market volatility affects stock returns both directly and indirectly through its impact on liquidity provision. The negative relation between market volatility and stock returns arises not only from greater risk premiums but also greater illiquidity premiums that are associated with higher market volatility. This paper offers a rational explanation for the puzzling empirical fact that stock returns decrease with an increase in the volatility of liquidity. We model liquidity as a stochastic price impact process and define the liquidity premium as the additional return necessary to compensate a multiperiod investor for the adverse price impact of The Volatility of Liquidity and Expected Stock Returns∗ Ferhat Akbas†, Will J. Armstrong ‡, Ralitsa Petkova § January, 2011 ABSTRACT We document a positive relation between the volatility of liquidity and expected returns. Our measure of liquidity is based on Amihud (2002) and its volatility is measured using daily data. This paper considers liquidity as an explanation for the positive association between expected idiosyncratic volatility (IV) and expected stock returns. Liquidity costs may affect the stock returns, through bid-ask bounce and other microstructure-induced noise, which will affect the estimation of IV.
This paper offers a rational explanation for the puzzling empirical fact that stock returns decrease with an increase in the volatility of liquidity. We model liquidity as a stochastic price impact process and define the liquidity premium as the additional return necessary to compensate a multiperiod investor for the adverse price impact of
rates on expected returns in U.S. and global equity markets.1 Jensen, Mercer, market returns, volatility, and liquidity, as well as the term spread, changes in Aug 7, 2015 The positive relation between stock return volatility and illiquidity has long shown that liquidity risk significantly affects expected returns (e.g., Jan 1, 2005 volatility of liquidity shocks to the stock market increased dramatically. A number of expected returns to buy or sell a large volume of shares. The positive correlation between the volatility of liquidity and expected returns suggests that risk averse investors require a risk premium for holding stocks that have high variation in liquidity. Higher variation in liquidity implies that a stock may become illiquid with higher probability at a time when it is traded. returns and the volatility of liquidity and demonstrate that this negative relation is consistent with utility-maximizing investment strategies of risk-averse investors. We examine the relation between expected stock returns and the volatility of liquidity in a dynamic portfolio-choice model with stochastic liquidity. Speciflcally, a constant
AbstractThis article examines the impact of various sources of systematic liquidity risk and idiosyncratic liquidity risk on expected returns in the Indian stock
Aug 7, 2015 The positive relation between stock return volatility and illiquidity has long shown that liquidity risk significantly affects expected returns (e.g., Jan 1, 2005 volatility of liquidity shocks to the stock market increased dramatically. A number of expected returns to buy or sell a large volume of shares.
Oct 26, 2018 liquidity matters in explaining the expected stock returns; (2) Fama-French factors are also important in explaining the cross-sectional variation
investor, his expected utility will be lower than in the case of investing in a per- fectly liquid stock. The liquidity premium is defined as the extra return that the illiquid
This relationship has not been studied to date for emerging markets. This study relates the current-month’s idiosyncratic volatility to the subsequent month’s stock returns for a sample of both developed and emerging markets expanding benchmark factors by including both a momentum and a systematic liquidity risk component.
Liquidity a⁄ects various capital market outcomes such as expected returns and cap-ital structure. Prior research has shown that an important determinant of liquidity is volatility, where higher stock return volatility is associated with higher illiquidity costs. Using recent developments in the literature, we revisit this relation and This relationship has not been studied to date for emerging markets. This study relates the current-month’s idiosyncratic volatility to the subsequent month’s stock returns for a sample of both developed and emerging markets expanding benchmark factors by including both a momentum and a systematic liquidity risk component.
Jun 7, 2019 The article explores the relationship between volatility and liquidity, as there is a change in market Liquidity risk and expected stock returns. Jan 11, 2015 The apparent inverse relation between liquidity and expected returns between expected equity returns and the level as well as the volatility of