The Time Variation of Liquidity Risk on US Stock Markets

Abstract

Abstract The influence of liquidity costs and liquidity risk on asset returns has been proven by several empirical studies. This paper analyzes the conditional version of the liquidity-adjusted capital asset pricing model and shows that betas significantly vary over different economic regimes and that liquid portfolios provide diversification benefits compared with illiquid portfolios. The results support the effects of a flight-to-liquidity. The time variation of liquidity betas induces additional risk for investors, which has important implications for investment decisions and asset allocation. Die Zeitschwankung des Liquiditatsrisikos in US-Aktienmarkten Zusammenfassung Der Einfluss von Liquiditatskosten und Liquiditatsrisiko auf die Renditen verschiedener Assets wurde bereits durch einige Studien belegt. Dieses Paper untersucht das conditional liquidity-adjusted capital asset pricing model und zeigt, dass die Liquidity-Betas signifikant uber verschiedene Marktphasen hinweg schwanken und dass liquide P...