The Rodney L . White Center for Financial Research What “ Triggers ” Mortgage Default ?

This study investigates whether market-wide liquidity is a state variable important for asset pricing. We Þnd that expected stock returns are related cross-sectionally to the sensitivities of returns to ßuctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order ßow induces greater return reversals when liquidity is lower. Over a 34-year period, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5% annually, adjusted for exposures to the market return as well as size, value, and momentum factors. JEL ClassiÞcation: G12

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