State-Dependent Variations in the Expected Illiquidity Premium

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Recent evidence on state-dependent variations in market liquidity suggests strong variations in the illiquidity premium across economic states. Adopting a two-state Markov switching model, we find that, while illiquid stocks are affected more by economic conditions than liquid ones are during recessions, the differences in expected returns are relatively small during expansions. Therefore, the expected illiquidity premium displays strong state-dependent variations that are countercyclical. We show that the state of a high illiquidity premium is closely associated with periods of real economic recessions, market declines, and high volatility, which coincides with major events of liquidity dry-up and high liquidity commonality.
Publisher
OXFORD UNIV PRESS
Issue Date
2017-10
Language
English
Article Type
Article
Keywords

STOCK RETURNS; LIQUIDITY RISK; CROSS-SECTION; MARKET LIQUIDITY; PRICES; PREDICTABILITY; CONSUMPTION; INFLATION; MOMENTUM; COSTS

Citation

REVIEW OF FINANCE, v.21, no.6, pp.2277 - 2314

ISSN
1572-3097
DOI
10.1093/rof/rfw053
URI
http://hdl.handle.net/10203/227064
Appears in Collection
MT-Journal Papers(저널논문)
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