The volatility of liquidity and expected stock returns mnprelf

The volatility of liquidity and expected stock returns

29.12.2020

Trevillion610

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 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. The volatility of liquidity is a stock-specific characteristic that measures the uncertainty associated with the level of liquidity of the stock at the time of trade. The positive correlation between the volatility of liquidity and expected returns suggests that risk averse investors require a risk premium 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. Abstract. This paper offers a rational explanation for the puzzling empirical fact that stock returns decrease 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 multi-period investor for the adverse price impact of trading. This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross‐sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual‐stock measures estimated with daily data, relies on the principle that order flow induces

Mar 18, 2011 We document a positive relation between the volatility of liquidity and expected returns. Our measure of liquidity is based on Amihud (2002)

Oct 15, 2016 Liquidity affects various capital market outcomes such as expected returns of liquidity and demonstrated the role stock return volatility plays in We eliminate microstructure influences from stock closing price-based returns and estimate expected IV. •. There is a premium for IV in the value-weighted which the information environment of the firm can affect liquidity. Modern models for the structure of volatility treat stock returns as a jump-diffusion where µ and σ are constants, κ ≡ E (Zt − 1) is the expected relative jump of St, and Jt ≡.

which the information environment of the firm can affect liquidity. Modern models for the structure of volatility treat stock returns as a jump-diffusion where µ and σ are constants, κ ≡ E (Zt − 1) is the expected relative jump of St, and Jt ≡.

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

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

Moreover, understanding how each volatility component impacts liquidity is important for the understanding of asset pricing as prior studies have shown that liquidity risk significantly affects expected returns (e.g., Pastor and Stambaugh, 2003; Acharya and Pederson, 2005; Brunnermeier and Pederson, 2009). Idiosyncratic Volatility, Momentum, Liquidity, and Expected Stock Returns in Developed and Emerging Markets . Lorne N. Switzer* Concordia University, Montreal, Quebec, CANADA . Alan Picard . Concordia University, Montreal, Quebec, CANADA . Abstract . This paper re-examines the link between idiosyncratic risk and expected returns for a large

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.

We eliminate microstructure influences from stock closing price-based returns and estimate expected IV. •. There is a premium for IV in the value-weighted which the information environment of the firm can affect liquidity. Modern models for the structure of volatility treat stock returns as a jump-diffusion where µ and σ are constants, κ ≡ E (Zt − 1) is the expected relative jump of St, and Jt ≡. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, Downloadable! Literatures have shown that idiosyncratic volatility and liquidity risk calculated from stock markets have explanatory power in stock returns. AbstractThis article examines the impact of various sources of systematic liquidity risk and idiosyncratic liquidity risk on expected returns in the Indian stock However, the risk-and-return characteristic of REIT stocks has remained a debatable issue in the filed of financial study, since the low market volatility of REITs