Essays on liquidity of U.S. common stocks
Shalini Nageswaran2012
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Abstract
In Chapter 1, I find that stock characteristics do predict a stock's time-varying liquidity beta, i.e. its sensitivity to market, with the effect varying according to the assumed holding period using data on 30 small, medium, and large cap stocks between 1997 and 2002. I also find that liquidity is a priced factor for stock return even after controlling for market and stock measures of risk such as estimates of market volatility and stock level volatility. In order to mitigate problems arising from a small panel, I also test the returns model with ARCH errors on a larger sample of 2000 stocks. Chapter 2 accounts for endogenous liquidity in a standard asset pricing model. Loss of liquidity, especially during times of crises, needs to be incorporated into models of financial assets so as to forecast returns correctly. To identify the effect of endogenous stock liquidity
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