Liquidity risk and asset pricing

Hongtao Li, Robert Novy-Marx, Mihail Velikov

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

Pastor and Stambaugh’s (PS 2003) aggregate liquidity innovations can be closely replicated, as can their traded factor based on historically estimated liquidity betas, which performs even stronger out of sample. This factor’s performance is highly sensitive to construction details, however, and exhibits significantly weaker performance when rebalanced at its natural monthly frequency, or when constructed using either more or less extreme sorts. Their predicted liquidity risk factor is more difficult to replicate, and difficult to interpret because characteristics chosen to predict liquidity risk introduce mechanical relations to other known anomalies. Contrary to the claims of PS, liquidity risk appears essentially unrelated to momentum.

Original languageEnglish (US)
Pages (from-to)223-255
Number of pages33
JournalCritical Finance Review
Volume8
Issue number1-2
DOIs
StatePublished - Dec 17 2019

All Science Journal Classification (ASJC) codes

  • Finance

Fingerprint Dive into the research topics of 'Liquidity risk and asset pricing'. Together they form a unique fingerprint.

Cite this