Skip Navigation


RFS Advance Access originally published online on December 9, 2007
Review of Financial Studies 2008 21(6):2449-2486; doi:10.1093/rfs/hhm054
This Article
Right arrow Full Text
Right arrow Full Text (PDF)
Right arrow All Versions of this Article:
21/6/2449    most recent
hhm054v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Watanabe, A.
Right arrow Articles by Watanabe, M.
Right arrow Search for Related Content
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

© The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org.

Time-Varying Liquidity Risk and the Cross Section of Stock Returns

Akiko Watanabe
University of Alberta

Masahiro Watanabe
Rice University

Address correspondence to Masahiro Watanabe, Jones Graduate School of Management, Rice University, 6100 Main Street - MS531, Houston, TX 77005, United States, telephone: (713) 348-4168, fax: (713) 348-6296, or e-mail: watanabe{at}rice.edu.

JEL Classification: G12


  Abstract

This paper studies whether stock returns' sensitivities to aggregate liquidity fluctuations and the pricing of liquidity risk vary over time. We find that liquidity betas vary across two distinct states: one with high liquidity betas and the other with low betas. The high liquidity-beta state is short lived and characterized by heavy trade, high volatility, and a wide cross-sectional dispersion in liquidity betas. It also delivers a disproportionately large liquidity risk premium, amounting to more than twice the value premium. Our results are consistent with a model of liquidity risk in which investors face uncertainty about their trading counterparties' preferences.

We thank the editor, Matthew Spiegel, and an anonymous referee for valuable comments that have substantially improved the paper. The paper has also benefited from the comments of Frank de Jong, Xifeng Diao, Shingo Goto, Mark Huson, Jason Karceski, Aditya Kaul, Christian Lundblad, Anna Obizhaeva, Barbara Ostdiek, Kiyotaka Satoyoshi, Dimitri Vayanos, James Weston, Yuhang Xing, session participants at the 2006 Western Finance Association Meeting, the 2006 Texas Finance Festival, the 2005 European Finance Association Meeting, the 2006 Annual Empirical Asset Pricing Retreat at the University of Amsterdam, the 2006 Turnaround Management Association Global Education Symposium, the 2006 Tokyo Finance Research Workshop, the 2005 Joint Alberta/Calgary Finance Conference, and the 2005 Nippon Finance Association Meeting, and seminar participants at Rice University and the University of South Carolina. We also thank the 2006 Turnaround Management Association Global Education Symposium for awarding the first prize to this paper. Excellent research assistance of Aaron Fu and Heejoon Han is gratefully acknowledged. Akiko Watanabe acknowledges the Canadian Utilities and Nova Fellowships and the Support for the Advancement of Scholarship Grant from the University of Alberta School of Business.


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?




Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.