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The authors develop the Principal Component Analysis (PCA) approach to systematic liquidity measurement by introducing moving and expanding estimation windows. They evaluate these methods along with traditional estimation techniques (full sample PCA and market average) in terms of ability to explain cross-sectional stock liquidity and cross-sectional stock returns. For several traditional liquidity measures their results suggest an expanding window specification for systematic liquidity estimation. However, for price impact liquidity measures they find support for a moving window specification. The market average proxy of systematic liquidity produces the same degree of commonality, but does not have the same ability to explain stock returns as the PCA-based estimates.
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