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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Examining the Commonality in Liquidity and Volatility Risk

Vol.30, No.4, December , 13–41



  •   (University of the Pacific)

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Abstract  

We estimate latent factor models of liquidity and volatility. Common liquidity and volatility factors are extracted using multiple liquidity and volatility measures. Additionally, a latent factor is extracted by aggregating across both liquidity and volatility resulting in what we call the common uncertainty factor. The underlying uncertainty factor is correlated with the individual and the common liquidity and volatility factors as well as returns. We find that the underlying uncertainty risk factor is significantly priced in the cross section of expected returns, while the risks associated solely with liquidity and volatility are not suggesting that liquidity risk and volatility risk in stocks are related and should not be considered separately.


Keywords
   Liquidity, Volatility, Uncertainty

JEL classification codes
   G1, G12
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