erickson
02-03-2006, 12:06 AM
In the last paragraph on p.297, BKM state:
"CRS find commonality across stocks in the variable cost of liquidity: quoted spreads, quoted depth, and effective spreads covary with the market and industrywide liquidity. Hence, liquidity risk is systematic and therefore difficult to diversify."
Can anyone translate this for me?
My best guess is that the liquidity for stock i is correlated with overall market liquidity - when market volume is higher than normal, it's likely that volume for stock i is higher than normal.
Is that right?
"CRS find commonality across stocks in the variable cost of liquidity: quoted spreads, quoted depth, and effective spreads covary with the market and industrywide liquidity. Hence, liquidity risk is systematic and therefore difficult to diversify."
Can anyone translate this for me?
My best guess is that the liquidity for stock i is correlated with overall market liquidity - when market volume is higher than normal, it's likely that volume for stock i is higher than normal.
Is that right?