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Ludwig, M. The Time Variation of Liquidity Risk on US Stock Markets. Credit and Capital Markets – Kredit und Kapital, 51(2), 205-225. https://doi.org/10.3790/ccm.51.2.205
Ludwig, Michael "The Time Variation of Liquidity Risk on US Stock Markets" Credit and Capital Markets – Kredit und Kapital 51.2, 2018, 205-225. https://doi.org/10.3790/ccm.51.2.205
Ludwig, Michael (2018): The Time Variation of Liquidity Risk on US Stock Markets, in: Credit and Capital Markets – Kredit und Kapital, vol. 51, iss. 2, 205-225, [online] https://doi.org/10.3790/ccm.51.2.205

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The Time Variation of Liquidity Risk on US Stock Markets

Ludwig, Michael

Credit and Capital Markets – Kredit und Kapital, Vol. 51 (2018), Iss. 2 : pp. 205–225

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Michael Ludwig, University of Augsburg, FIM Research Center, Universitätsstraße 12, 86135 Augsburg

Abstract

The influence of liquidity costs and liquidity risk on asset returns has been proven by several empirical studies. This paper analyzes the conditional version of the liquidity-adjusted capital asset pricing model and shows that betas significantly vary over different economic regimes and that liquid portfolios provide diversification benefits compared with illiquid portfolios. The results support the effects of a flight-to-liquidity. The time variation of liquidity betas induces additional risk for investors, which has important implications for investment decisions and asset allocation.

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