Access to this article is restricted until 36 months after publication by the request of the publisher.. Restriction lift date: 2018-01-01
Liquidity commonality and pricing in UK equities
Loading...
Files
Accepted Version
Date
2015-01
Authors
Foran, Jason
Hutchinson, Mark C.
O'Sullivan, Niall
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier B.V.
Published Version
Abstract
We investigate the pricing of systematic liquidity risk in UK equities using a large sample of daily data. Employing four alternative measures of liquidity we first find strong evidence of commonality in liquidity across stocks. We apply asymptotic principal component analysis (PCA) on the sample of stocks to extract market or systematic liquidity factors. Previous research on systematic liquidity risk, estimated using PCA, is focused on the US, which has very different market structures to the UK. Our pricing results indicate that systematic liquidity risk is positively priced in the cross-section of stocks, specifically for the quoted spread liquidity measure. These findings around the pricing of systematic liquidity risk are not affected by the level of individual stock liquidity as a risk characteristic. However, counter-intuitively, we find that the latter is negatively priced in the cross-section of stocks, confirming earlier research.
Description
Keywords
Liquidity pricing , Liquidity risk , Commonality
Citation
FORAN, J., HUTCHINSON, M. C. & O'SULLIVAN, N. 2015. Liquidity commonality and pricing in UK equities. Research in International Business and Finance, 34, 281-293. doi:10.1016/j.ribaf.2015.02.006