Wednesday, July 8, 2015 | 12:30pm -1:30pm | Room 237, HSBC Business School Building

Abstract

This study examines the roles played by components of makret illiquidity in explaining the cross-section of expected stock returns. We decompose the innovation in the Amihud (2002) market illiquidity measure into macro and funding components. Using Fama-French 25 portfolios, we find significant risk premia associated with macro and funding components. Interestingly, the price of risk associated with macro component is negative whereas that with funding component is positive. The negative premium is consistent with the hypothesis that stocks with high exposure to the macro component of market illiquidity provides hedges against market downturn. The results remain unaffected in the recent subsample, in which the significance of market illiquidity factor is reportedly diminishing.