Cross-sectional Variation in Stock Returns: Liquidity and Idiosyncratic Risk
The roles played by idiosyncratic risk and liquidity in determining stock returns have recently received a great deal of attention. However, recent empirical tests have not examined the interaction between these two factors. As others have shown (and this paper confirms) stocks idiosyncratic risk and liquidity are negatively correlated. To what extent then is each variable responsible for the observed cross sectional patterns in stock returns? Overall, using monthly data, the paper finds that stock returns are increasing with the level of idiosyncratic risk and decreasing in a stocks liquidity. However, while both liquidity and idiosyncratic risk play a role in determining returns, the impact of idiosyncratic risk is much stronger and often eliminates liquiditys explanatory power. The point estimates indicate that a one standard deviation change in idiosyncratic risk has between 2.5 and 8 times the impact of a corresponding change in liquidity on cross sectional expected returns.
Matthew Spiegel Xiaotong Wang
School of Management P.O.Box 208200,New Haven,CT 06520-8200
国际会议
成都
英文
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）