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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce


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Volume 24 (2020)

How do volatility regimes affect the pricing of quality and liquidity in the stock market?

Tarik Bazgour
  • Corresponding author
  • Léonard de Vinci Pôle Universitaire, Research Center, Paris La Défense, France
  • University of Liège, HEC Liège Management School, Liège, Belgium
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/ Cedric Heuchenne / Georges Hübner / Danielle Sougné
Published Online: 2019-11-22 | DOI: https://doi.org/10.1515/snde-2018-0127

Abstract

This paper shows how stock market volatility regimes affect the cross-section of stock returns along quality and liquidity dimensions. We find that, during crisis periods, low quality and low liquidity stocks experience relatively higher losses than predicted in normal times, while high quality and high liquidity stocks experience rather relatively lower losses. These findings lend strong support to the presence of cross-market and within-market flight-to-quality and to-liquidity episodes during crisis periods. During low volatility periods, however, low quality and low liquidity stocks earn relatively larger returns, while high quality and high liquidity stocks yield lower returns; suggesting that low volatility conditions benefit junk and illiquid stocks but not quality and liquid stocks. Finally, our results reveal that liquidity level dominates liquidity beta in explaining stock returns across the different market volatility regimes.

This article offers supplementary material which is provided at the end of the article.

Keywords: financial crises; liquidity; liquidity risk; quality; volatility regimes

JEL Classification: G12; G32

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About the article

Published Online: 2019-11-22


Citation Information: Studies in Nonlinear Dynamics & Econometrics, 20180127, ISSN (Online) 1558-3708, DOI: https://doi.org/10.1515/snde-2018-0127.

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