Sell-order liquidity and the cross-section of expected stock returns

Abstract

We explain time-varying expected returns by time-variation in the covariance of the market return with the pricing kernel. Simple specifications in which the kernel is spanned by a small number of factors reveal substantial levels of predictability with 1-year of . The pricing kernel identified by the model is essentially orthogonal to news about expected returns, suggesting that the predictability of market returns is due to the time-varying risk of cash-flow news.