Norges Bank

Working Paper

What captures liquidity risk? A comparison of trade and order based liquidity factors

Author:
By Lorán Chollete, Randi Næs and Johannes A. Skjeltorp
Series:
Working Paper
Number:
3/2007

Abstract
Is the effect of liquidity risk on asset prices sensitive to our choice of liquidity proxy? In addressing this fundamental question, we achieve two main results. First, when we estimate factor models on a broad range of liquidity measures we uncover a profound distinction between trade and order based liquidity. Second, although the order based factor provides a better signal of available liquidity, we find that only the factor related to information risk explains expected returns both in a theoretical liquidity-CAPM model and in a linear pricing framework. Our results suggest a surprising fragility of liquidity-based asset pricing.

 

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ISSN 1502-8190 (online)

Published 28 June 2007 16:30
Published 28 June 2007 16:30