Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2013:24: Does Commonality in Illiquidity Matter to Investors?

Richard G. Anderson (), Jane M. Binner (), Björn Hagströmer () and Birger Nilsson ()
Additional contact information
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.

Keywords: commonality; commonality risk premium; asset illiquidity; systematic illiquidity; liquidity; effective tick

JEL-codes: G11; G12

50 pages, May 31, 2013

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WP13_24.pdf PDF-file 

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