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| Liquidity Risk and Expected Stock Returns by Luboš Pástor of the University of Chicago, and June 2003 Abstract: This study investigates whether market-wide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. Over a 34-year period, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5% annually, adjusted for exposures to the market return as well as size, value, and momentum factors. Keywords: asset pricing, liquidity risk, expected returns. Published in: Journal of Political Economy, Vol. 111, No. 3, (June 2003), pp. 642-685. Books Referenced in this Paper: (what is this?)
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