The returns, risk and liquidity relationship in high frequency trading: Evidence from the Oslo stock market

Abstract

The main purpose of this research is to investigate the relationship between returns, risk, and liquidity in high frequency trading. Panel analysis for single stocks is employed to investigate this relationship. The empirical results imply that in high frequency trading idiosyncratic risk plays a more pronounced role than systematic risk in asset pricing. First, idiosyncratic risk and liquidity have a highly significant impact on returns. Second, no evidence has been found for a significant relationship between systematic risk and returns. Finally, liquidity has a higher significant effect on idiosyncratic risk than systematic risk. The empirical results of the paper contribute to the previous literature in the high frequency context. Some previous literature suggests that idiosyncratic risk has a matter on low frequency trading, but has not yet investigated its effects on high frequency trading.