Examining the Commonality in Liquidity and Volatility Risk
نویسنده
چکیده
We estimate latent factor models of liquidity and volatility. Common liquidity and volatility factors are extracted using multiple liquidity and volatility measures. Additionally, latent factors are extracted by aggregating across both liquidity and volatility resulting in what we will call the common “uncertainty” factors. We find that volatility and the common uncertainty risk are significantly priced in the crosssection of expected returns while liquidity risk is not. Our results suggest that while liquidity and volatility risk factors may both proxy for an underlying uncertainty risk, there is an additional risk unique to volatility.
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