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Lookup NU author(s): Dr Minh Nguyen
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This study examines a market-wide liquidity measure based on the systematic deviations from Put-Call parity in the U.S. equity option markets. We show that this implied liquidity measure provides forward-looking information about market returns and significantly explains the cross-sectional variations of stock returns. We show that investing in the stocks with the largest exposure to the innovations in the implied liquidity and shorting the stocks with the smallest generate significant returns of about $7.3$ percent per annum. The explanatory power of implied liquidity for the cross-sectional variations of stock returns remain robust after controlling for various liquidity influences, the short-selling constraints and the effects of information asymmetry.
Author(s): Nguyen M, Yang Y
Publication type: Article
Publication status: Submitted
Journal: Journal of Financial Research
Year: 2021
Notes: Revised and Submitted.
