Joint Extreme events in equity returns and liquidity and their cross-sectional pricing implications

Stefan Ruenzi, Michael Ungeheuer, Florian Weigert*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We merge the literature on downside return risk and liquidity risk and introduce the concept of extreme downside liquidity (EDL) risks. The cross-section of stock returns reflects a premium if a stock's return (liquidity) is lowest at the same time when the market liquidity (return) is lowest. This effect is not driven by linear or downside liquidity risk or extreme downside return risk and is mainly driven by more recent years. There is no premium for stocks whose liquidity is lowest when market liquidity is lowest.

Original languageEnglish
Article number105809
Pages (from-to)1-31
JournalJOURNAL OF BANKING AND FINANCE
Volume115
Early online date19 Mar 2020
DOIs
Publication statusPublished - Jun 2020
MoE publication typeA1 Journal article-refereed

Keywords

  • Asset pricing
  • Crash aversion
  • Downside risk
  • Liquidity risk
  • Tail risk

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