Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2008/7:
The Risk Components of Liquidity
Lorįn Chollete ()
, Randi Nęs ()
and Johannes A. Skjeltorp ()
Abstract: Does liquidity risk differ depending on our choice of
liquidity proxy? Unlike literature that considers common liquidity
variation, we focus on identifying different components of liquidity,
statistically and economically, using more than a decade of US transaction
data. We identify three main statistical liquidity factors which are
utilized in a linear asset pricing framework. We motivate a correspondence
of the statistical factors to traditional dimensions of liquidity as well
as the notion of order and trade based liquidity measures. We find evidence
of multiple liquidity risk premia, but only a subset of the financial
liquidity factors are associated with significant risk premia. These are
the factors that we relate to the dimensions of immediacy and resilliency,
while the depth dimension does not command a risk premium in any of the
models. Our results suggests caution when choosing liquidity variables in
asset pricing applications, since liquidity premia may be reflected in only
some dimensions of liquidity.
Keywords: Liquidity Risk; Liquidity Factors; Asset Pricing; Market Microstructure; (follow links to similar papers)
JEL-Codes: G12; G14; (follow links to similar papers)
24 pages, March 12, 2008
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