The impact of liquidity risk on stock returns of European and American banks in the context of the subprime crisis

Abstract

Literature shows that liquidity risk is an important determinant of stock performance, particularly during times of stress in the financial system. The following paper studies the relationship between liquidity risk and stock returns, using a data set of 87 banks, European and American, over the period of 2004-2011. Liquidity risk is measured by the bid-ask spread on stocks and the empirical study is performed with three types of analyses – a cross-sectional and a panel on the overall sample and four cross-sectional studies on individual banks. The results show that not only liquidity risk became more important to explain bank stock returns, but also that investors changed their attitude towards liquidity risk, after the turmoil of 2007. That may be the result of a “flight to liquidity” behavior during that time.

Date of Award	2011
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Philippe Spieser (Supervisor)