Download or read book Time-Varying Liquidity Risk and the Cross Section of Stock Returns written by Akiko Watanabe and published by . This book was released on 2013 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies whether stock returns' sensitivities to aggregate liquidity fluctuations and the pricing of liquidity risk vary over time. We find that liquidity betas vary across two distinct states: one with high liquidity betas and the other with low betas. The high liquidity-beta state is short lived and characterized by heavy trade, high volatility, and a wide cross-sectional dispersion in liquidity betas. It also delivers a disproportionately large liquidity risk premium, amounting to more than twice the value premium. Our results are consistent with a model of liquidity risk in which investors face uncertainty about their trading counterparties' preferences.