Does commonality in illiquidity matter to investors? Working Paper 2013-020A by Richard G. Anderson, Jane M. Binner, Björn Hagströmer, and Birger Nilsson. Federal Reserve Bank of St. Louis. June 2013.
“This paper investigates whether investors are compensated for taking on commonality risk in equity portfolios. A large literature documents the existence and the causes of commonality in illiquidity, but the implications for investors are less understood. We find a return premium for commonality risk in NYSE stocks that is both economically and statistically significant. The commonality risk premium is independent of illiquidity level effects, and robust to variations in illiquidity measurement and systematic illiquidity estimation. We also show that precision in commonality risk estimation can be increased by the use of daily illiquidity measures, instead of monthly.”