Working Papers, Department of Economics, Lund University
Richard G. Anderson
Does Commonality in Illiquidity Matter to Investors?
(), Jane M. Binner
(), Björn Hagströmer
() and Birger Nilsson
Abstract: This paper investigates whether investors are compensated
for taking on commonality risk in equity portfolios. A large literature
documents the existence and the causes of commonality in illiquidity, but
the implications for investors are less understood. We find a return
premium for commonality risk in NYSE stocks that is both economically and
statistically signi cant. The commonality risk premium is independent of
illiquidity level effects, and robust to variations in illiquidity
measurement and systematic illiquidity estimation. We also show that
precision in commonality risk estimation can be increased by the use of
daily illiquidity measures, instead of monthly.
Keywords: commonality; commonality risk premium; asset illiquidity; systematic illiquidity; liquidity; effective tick; (follow links to similar papers)
JEL-Codes: G11; G12; (follow links to similar papers)
50 pages, May 31, 2013
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