Pricing the commonality across alternative measures of liquidity |
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Authors: | Robert A Korajczyk Ronnie Sadka |
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Institution: | 1. Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208-2001, USA;2. University of Washington, Finance & Business Economics, Box 353200 Seattle, WA 98195, USA |
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Abstract: | We estimate latent factor models of liquidity, aggregated across various liquidity measures. Shocks to assets’ liquidity have a common component across measures which accounts for most of the explained variation in individual liquidity measures. We find that across-measure systematic liquidity is a priced factor while within-measure systematic liquidity does not exhibit additional pricing information. Controlling for across-measure systematic liquidity risk, there is some evidence that liquidity, as a characteristic of assets, is priced in the cross-section. Our results are robust to the inclusion of other equity characteristics and risk factors, such as market capitalization, book-to-market, and momentum. |
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