Liquidity Risk After 20 Years
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.
The views in this paper are the responsibility of the authors, not the institutions with which they are affiliated, nor of the National Bureau of Economic Research. For helpful comments, we thank Doug Diamond, Ralph Koijen, Stefan Nagel, Robert Novy-Marx, Jeff Pontiff, Jeff Russell, Rob Vishny, and the seminar audience at the University of Chicago. We are also grateful to the Fama-Miller Center for Research in Finance and the Center for Research in Security Prices, both at Chicago Booth, for research support.
Lubos Pastor & Robert F. Stambaugh, 2019. "Liquidity Risk After 20 Years," Critical Finance Review, vol 8(1-2), pages 277-299.