Richard G. Anderson (), Jane M. Binner (), Björn Hagströmer () and Birger Nilsson ()
Richard G. Anderson: Federal Reserve Bank of St. Louis
Jane M. Binner: Sheffield University Management School
Björn Hagströmer: Stockholm University School of Business
Birger Nilsson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
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.
50 pages, May 31, 2013
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