Home > Working Papers

Working Paper 2009-025A

"Dynamics in Systematic Liquidity"
by Björn Hagströmer, Richard G. Anderson, Jane M. Binner, and Birger Nilsson

We develop the principal component analysis (PCA) approach to systematic liquidity measurement by introducing moving and expanding estimation windows. We evaluate these methods along with traditional estimation techniques (full sample PCA and market average) in terms of ability to explain (1) cross-sectional stock liquidity and (2) cross-sectional stock returns. For several traditional liquidity measures our results suggest an expanding window specification for systematic liquidity estimation. However, for price impact liquidity measures we find support for a moving window specification. The market average proxy of systematic liquidity produces the same degree of commonality, but does not have the same ability to explain stock returns as the PCA-based estimates.

Full Text - Acrobat PDF (560k)

Notify Me of Updates for:
Category > Monetary Policy/Macroeconomics
Author > Richard G. Anderson
Research Papers and Publications: JEL Code > G10
Research Papers and Publications: JEL Code > C02