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Stock Returns and the Volatility of Liquidity

Harold H. Zhang

出版	SSRN, 2009
URL	http://books.google.com.hk/books?id=2ybWzgEACAAJ&hl=&source=gbs_api

註釋

This paper offers a rational explanation for the puzzling empirical fact that stock returns decrease in the volatility of liquidity. We model liquidity as a stochastic price impact process and define the liquidity premium as the additional return necessary to compensate a multi-period investor for the adverse price impact of trading. The model demonstrates that a fully rational, utility maximizing, risk averse investor can take advantage of time-varying liquidity by adapting his trades to the state of liquidity. A higher volatility in liquidity offers more opportunity for the investor to time his trades and is therefore associated with a lower required liquidity premium. We provide empirical evidence consistent with the model. First, we document a cross sectional negative relation between stock returns and the volatility of liquidity measured by price impact. Second, we find a time series causality relation from price impact to trading activity.