Abstract
This paper investigates country, industry, and global commonalities in liquidity of individual stocks, and analyzes their implications for the pricing of financial assets in an international framework for a sample from the United States, the United Kingdom, and Japan covering the period from 1980 to 2001. The results for three dierent monthly liquidity measures — based on daily return and trading volume data — suggest that individual stock liquidity exhibits commonalities within countries and industries and co-moves globally. Furthermore, global and country-specific commonalities dominate industry eects as the source of common variation in liquidity. The asset pricing analysis suggests that expected stock returns are cross-sectionally related to the sensitivity of returns to shocks in global liquidity, and that global liquidity is a priced risk factor. The hypotheses that the liquidity risk premiums are equal across countries and industries cannot be rejected. Moreover, the results are neither driven by time-varying levels of asset-specific liquidity, nor by observations from recently listed firms, for which liquidity and return processes are likely dierent.
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