Liquidity, Liquidity Commonality and Its Impact on Portfolio Theory

Domowitz, Ian; Beardsley, Xiaoxin Wang

doi:10.2139/ssrn.296870

Cited by 20 publications

(13 citation statements)

References 8 publications

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“…1 However, considering liquidity in investment is important since liquidity affects portfolio investment performance (Holthausen, Leftwich, and Mayers (1991), Keim (2003), Lesmond, Schill, and Zhou (2004), Korajczyk and Sadka (2005)) and it has a significant implication for portfolio diversification strategies (Domowitz and Wang (2002), Harford and Kaul (2004)). In addition, it has been shown that liquidity affects the cross-sectional differences of asset returns as a characteristic (Amihud and Mendelson (1986), Brennan and Subrahmanyam (1996), Amihud (2002)) or as a risk factor (Pastor and Stambaugh (2003), Sadka (2004), Acharya and Pedersen (2005)).…”

Section: Introductionmentioning

confidence: 99%

The world price of liquidity risk

Lee

2011

Journal of Financial Economics

410

223

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Section: Introductionmentioning

confidence: 99%

The world price of liquidity risk

Lee

2011

Journal of Financial Economics

410

223

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“…Aggregate arguments associated with liquidity restrictions directly related to the discussion above have been put forward by Acharya and Pedersen (2003), Amihud (2002), Domowitz and Wang (2002), Ericsson and Renault (2000), Holmström and Tirole (2001), Lustig (2001), P&S (2003), and Sadka (2003). These papers develop either theoretical or empirical arguments implying a covariance between returns and some measure of aggregate liquidity.…”

mentioning

confidence: 99%

Asset pricing and systematic liquidity risk: An empirical investigation of the Spanish stock market

Martínez

Nieto

Rubio

et al. 2005

International Review of Economics & Finance

118

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Systematic liquidity shocks should affect the optimal behavior of agents in financial markets. Indeed, fluctuations in various measures of liquidity are significantly correlated across common stocks. Accordingly, this paper empirically analyzes whether Spanish average returns vary cross sectionally with betas estimated relative to three competing liquidity risk factors. The first one, proposed by Pastor and Stambaugh [J. Polit. Econ. III (2003) 642], is associated with the temporary price fluctuation reversals induced by the order flow. Our market-wide liquidity factor is defined as the difference between returns highly sensitive to changes in the relative bid -ask spread and returns with low sensitivities to those changes. Finally, the aggregate ratio of absolute stock returns to euro volume, as suggested by Amihud [J. Financ. Mark. 5 (2002) 31], is also employed. Our empirical results show that systematic liquidity risk is significantly priced in the Spanish stock market exclusively when betas are measured relative to the illiquidity risk factor based on the price response to one euro of trading volume on either unconditional or conditional versions of liquidity-based asset pricing models.

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“…Daily realized volumes also measure the liquidity effects of an asset, but only cover its transacted depth. A number of papers have proposed measures that combine tightness and depth, such as the Hasbrouck and Seppi (2001) quote slope, the Domowitz and Wang (2002) order book integral, the Amihud (2002) ratio of average volume effect on absolute returns, or the Pastor and Stambaugh (2003) measure for average volume-related return reversal. The former two consider the existing shape of the available order book through time, while the latter rely on transacted prices and volumes.…”

Section: Introductionmentioning

confidence: 99%