Systematic liquidity and the funding liquidity hypothesis

Is Commonality in Liquidity a Priced Risk Factor?

“…This way, commonality in liquidity is associated with market imperfections, where stocks with higher commonality in liquidity are more illiquid than other stocks, when the market in general becomes illiquid. In this sense, if the external funding of firms with higher commonality is more costly or more sensitive to market conditions than that of other firms, then ISSN 1678-6971 (electronic version) • RAM, São Paulo, 21(2), eRAMF200158, 2020 doi:10.1590/1678-6971/eRAMF200158 these firms should invest less to reduce the adverse selection cost and/or preserve financial slacks for bad economic states (Qian et al, 2014).…”

“…Then, due to the low liquidity of the Brazilian stock market, we expect to find high commonality for the traded stocks, because commonality is the risk that a security becomes more illiquid when the market in general becomes more illiquid (Anderson et al, 2016). Besides, when analyzing its temporal aspect, we may observe whether this phenomenon is durable and also observe the implications of commonality for investors (demanding greater return for more sensitive assets), regulators (market crisis risk due to systematic variations in liquidity) and firms, since commonality negatively influences the value invested by firms (Qian et al, 2014).…”

“…More intuitively, just like the correlation among stocks is important for the variance of a portfolio, commonality in liquidity becomes important for the expected transaction cost, considering that stocks that are more likely to become illiquid during market declines will have higher transaction costs (Anderson, Binner, Hagströmer, & Nilsson, 2016). Based on this, investors must be more attentive to the variance in liquidity due to systematic factors, considering that it is a non-diversifiable risk source and cases of reduced market liquidity occur when investors need urgent liquidity (Qian, Tam, & Zhang, 2014). Then, investors must demand a higher return rate to purchase stocks whose liquidity is more sensitive to systematic liquidity.…”

“…Therefore, using the approach used by Qian et al (2014) and Anderson et al (2016), this study intends to complement and feed the national literature on commonality in liquidity, by investigating whether commonality in liquidity is priced, and by investigating its relations with stock returns in the Brazilian stock market.…”

Sustainable Entrepreneurship in China

“…Hou et al (2013) showed that executive remuneration is more sensitive to the performance of the share returns of listed SOEs due to the SSSR, and that there is an increased relationship between executive remuneration and this performance after the reform. Qian et al (2014) found that large increases in the share supply resulted in a positive impact on liquidity commonality due to the reform, from 2005 to 2007. One of the implications of this research was that, because an increase in liquidity commonality in markets reduces investors' ability to diversify their risk, this represented a potential cost to the SSSR.…”