07.24.22 | NYU VLab’s Measure of Expected Capital Shortfalls in a Crisis

A Comparative Analysis of Sector Health in the S&P 500

For Friday, every sector had decreases in their liquidity.  All but three showed increases in illiquidity more than 2%.

The NYU V-Lab publishes summary information about the fitted liquidity models for equity sectors. Liquidity is defined as the degree to which an asset can be bought or sold in a market without affecting the asset’s price.

In a crisis, undercapitalized sectors, funded largely with fragile short-term debt, experience capital shortfalls and failures.

Over time, expected market illiquidity has been shown to positively affect ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. In addition, stock returns are negatively related over time to contemporaneous unexpected illiquidity. The Amihud illiquidity measure is the average across stocks of the daily ratio of absolute stock return to dollar volume. Illiquidity affects more strongly small firm stocks, thus explaining time series variations in their premiums over time.