Working Paper: NBER ID: w25774
Authors: Lubos Pastor; Robert F. Stambaugh
Abstract: The Critical Finance Review commissioned Li, Novy-Marx, and Velikov (2017) and Pontiff and Singla (2019) to replicate the results in Pástor and Stambaugh (2003). Both studies successfully replicate our market-wide liquidity measure and find similar estimates of the liquidity risk premium. In the sample period after our study, the liquidity risk premium estimates are even larger, and the liquidity measure displays sharp drops during the 2008 financial crisis. We respond to both replication studies and offer some related thoughts, such as when to use our traded versus non-traded liquidity factors and how to improve the precision of liquidity beta estimates.
Keywords: liquidity risk; asset pricing; financial crisis
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity risk (G33) | asset pricing (G19) |
| liquidity betas (C46) | expected returns (G17) |
| liquidity shocks (E44) | asset prices (G19) |
| liquidity factor (E41) | post-sample performance (C52) |