The asset pricing effects of UK market liquidity shocks: evidence from tick data

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Date
2014-03
Authors
Foran, Jason
Hutchinson, Mark C.
O'Sullivan, Niall
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Publisher
Elsevier
Published Version
10.1016/j.irfa.2014.01.010
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Abstract
Using tick data covering a 12 year period including much of the recent financial crisis we provide an unprecedented examination of the relationship between liquidity and stock returns in the UK market. Previous research on liquidity using high frequency data omits the recent financial crisis and is focused on the US, which has a different market structure to the UK. We first construct several microstructure liquidity measures for FTSE All Share stocks, demonstrating that tick data reveal patterns in intra-day liquidity not observable with lower frequency daily data. Our asymptotic principal component analysis captures commonality in liquidity across stocks to construct systematic market liquidity factors. We find that cross-sectional differences in returns exist across portfolios sorted by liquidity risk. These are strongly robust to market, size and value risk. The inclusion of a momentum factor partially explains some of the liquidity premia but they remain statistically significant. However, during the crisis period a long liquidity risk strategy experiences significantly negative alphas.
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Keywords
Liquidity risk , Liquidity measures , Asset pricing
Citation
FORAN, J., HUTCHINSON, M. C. & O'SULLIVAN, N. 2014. The asset pricing effects of UK market liquidity shocks: Evidence from tick data. International Review of Financial Analysis, 32, 85-94. http://dx.doi.org/10.1016/j.irfa.2014.01.010
Link to publisher’s version
http://www.sciencedirect.com/science/article/pii/S1057521914000180
URI
https://hdl.handle.net/10468/1466
Collections
Economics - Journal Articles
Accounting and Finance - Journal Articles
Centre for Investment Research - Journal Articles
Copyright
Copyright © 2014 Elsevier Inc. All rights reserved. NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis [Volume 32, March 2014, Pages 85–94] http://dx.doi.org/10.1016/j.irfa.2014.01.010