Extreme Downside Liquidity Risk

Stefan Ruenzi, Michael Ungeheuer () and Florian Weigert ()

No 1326, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: We merge the literature on downside return risk with that on systematic liquidity risk and introduce the concept of extreme downside liquidity (EDL) risk. We show that the cross-section of expected stock returns reflects a premium for EDL risk. Strong EDL risk stocks deliver a positive risk premium of more than 4% p.a. as compared to weak EDL risk stocks. The effect is more pronounced after the market crash of 1987. It is not driven by linear liquidity risk or by extreme downside return risk, and it cannot be explained by other firm characteristics or other systematic risk factors.

Keywords: Asset Pricing; Crash Aversion; Downside Risk; Liquidity Risk; Tail Risk (search for similar items in EconPapers)
JEL-codes: C12 C13 G01 G11 G12 G17 (search for similar items in EconPapers)
Pages: 81 pages
Date: 2013-11, Revised 2015-07
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2013:26

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