The recent financial crisis has shown that liquidity risk is far more important and intricate than regulators had previously acknowledged. The shift from bankbased to market-based financial systems and from deferred net settlement systems to liquidity-demanding real-time gross settlement of payments explains some of the shortcomings of traditional liquidity risk management. Although liquidity r...

This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have significant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In t...

This research seeks statistical commonalities in market liquidity across a range of corporate equities and bond markets and commodity futures markets, with an aim to better understanding system-level patterns in aggregate or funding liquidity that arise from broad patterns in market liquidity. We present a Bayesian estimation of hidden Markov chain (HMC) models to measure the latent structure o...

This paper proposes a new non-parametric method for estimating model-free, time-varying liquidity betas which builds on realized covariance and volatility theory. Working under a liquidityadjusted CAPM framework we provide evidence that liquidity risk is a factor priced in the Greek stock market, mainly arising from the covariation of individual liquidity with local market liquidity, however, t...

This paper studies the pricing of liquidity risk in the cross section of corporate bonds for the period from January 1994 to March 2009. The average return on bonds with high sensitivities to aggregate liquidity exceeds that for bonds with low sensitivities by about 4% annually. The positive relation between expected corporate bond returns and liquidity beta is robust to the effects of default ...

We study the interplay between corporate liquidity and asset reallocation. Our model shows that financially distressed firms are acquired by liquid firms in their industries even in the absence of operational synergies. We call these transactions ‘‘liquidity mergers,’’ since their purpose is to reallocate liquidity to firms that are otherwise inefficiently terminated. We show that liquidity mer...

Market liquidity has an important role in trading on stock markets, since on illiquid markets the implicit cost of trading can cause notable losses for the investors. Therefore market participants should always measure the liquidity of the markets, which they can carry out in two ways, in a static and in a dynamic form. The most commonly used liquidity measures – bid-ask spread and the turnover...

This article presents a discussion of stock market liquidity and its relation to financial crises. It begins by defining liquidity and explaining possible measures of liquidity and then explores factors influencing liquidity. It also analyzes the liquidity among 11 Asian countries. The empirical findings based on the time-series analysis show a sharp decline in stock liquidity during both the 1...

Based on the premise that non-trading reflects illiquidity, we hypothesize that managers use stock splits to attract more uninformed trading so that market makers can provide liquidity services at lower costs, which increases investors’ trading propensity and improves liquidity. The improvement allows investors to face reduced liquidity risk and require a lower liquidity premium, which in turn ...

This article presents a discussion of stock market liquidity and its relation to financial crises. It begins by defining liquidity and explaining possible measures of liquidity and then explores factors influencing liquidity. It also analyzes the liquidity among 11 Asian countries. The empirical findings based on the time-series analysis show a sharp decline in stock liquidity during both the 1...