Liquidity Forecasts and Expected Stock Returns
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SeriesBrown Bag Seminars in Finance
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SpeakerClaus Schmitt (RSM)
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FieldFinance
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LocationErasmus University, V-Building, Room VB-02
Rotterdam -
Date and time
November 20, 2019
12:00 - 13:15
Abstract: In their seminal work, Amihud and Mendelson (1986) show that
higher transaction costs increase expected stock returns. Contrary to their
findings, recent evidence questions the effect of stock illiquidity on expected
stock returns. We present an alternative explanation for this phenomenon and
argue that existing illiquidity measures do not sufficiently capture investors'
expectations about future illiquidity. We develop a prediction model for future
changes in stock illiquidity and test its performance out-of-sample. We find
that the prediction model is able to forecast economically large and persistent
changes in illiquidity. Subsequent asset pricing tests show that the effect of
illiquidity on expected stock returns strongly depends on expectations about
future illiquidity.