Abstract
Liquidity is a multidimensional concept with most liquidity measures proxying for only one of the many facets. Using nine low-frequency liquidity proxies, this study calculates composite liquidity measures by extracting the commonality across liquidity dimensions. As a stock characteristic, composite liquidity is priced cross-sectionally and most individual measures are not priced in addition. While five-factor models that include the liquidity factors from Pastor and Stambaugh (2003) or Sadka (2006) are insufficient to explain the returns of composite liquidity sorted portfolios, a liquidity risk factor constructed as factor mimicking portfolio describes the distribution of composite liquidity sorted returns well. Between characteristics and risk, however, it is the characteristics that bear a stronger relation to returns rather than liquidity factor loadings.
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