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AI Summary of Peer-Reviewed Research

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Market greenness predicts liquidity shocks

An illustration depicting sustainable finance and economic growth, featuring green buildings with renewable energy sources on the left, a balanced scale in the center with a plant and coins, financial charts and graphs on the right, and stacks of gold coins and various trend lines in the foreground.
Research area:Financial economicsFinanceSustainable Finance and Green Bonds

What the study found

Market greenness, meaning the market’s environmental, social, and governance (ESG) performance, predicts liquidity shocks during periods plausibly associated with shifts in investors’ ESG tastes. The authors also report that ESG-related liquidity is not explained by well-established risk factors.

Why the authors say this matters

The authors conclude that ESG-related liquidity may help explain stock alphas, meaning return patterns not explained by classic risk factors, and that it can reduce pricing errors relative to the Pástor-Stambaugh liquidity measure before 2020. The study suggests that shifts in investors’ ESG tastes matter for asset pricing.

What the researchers tested

The researchers built on the Pástor-Stambaugh liquidity measure and an equilibrium model that incorporates investors’ ESG preferences. They tested whether market greenness predicts liquidity shocks and whether forecasts of ESG-related liquidity improve stock pricing.

What worked and what didn't

Market greenness predicted Pástor-Stambaugh liquidity innovations in 2015-2019. Forecasts of ESG-related liquidity reduced stock alphas more effectively than the Pástor-Stambaugh liquidity measure in the period when market greenness predicted liquidity, and ESG-related liquidity contained information not captured by other well-established risk factors.

What to keep in mind

The abstract does not describe detailed limitations beyond indicating the period in which the predictive relationship was observed. The summary available here is limited to the claims stated in the title and abstract.

Key points

  • Market greenness predicted liquidity shocks in 2015-2019.
  • ESG-related liquidity was not spanned by well-established risk factors.
  • Forecasts of ESG-related liquidity reduced stock alphas more effectively than the Pástor-Stambaugh measure before 2020.
  • The authors tie the predictability of liquidity to shifts in investors’ ESG tastes.

Disclosure

Research title:
Market greenness predicts liquidity shocks
Authors:
Javier Rojo-Suárez, Ana B. Alonso-Conde, Vitor Gabriel, Juan David González-Ruíz
Institutions:
Universidad Rey Juan Carlos, Instituto Politécnico da Guarda, Universidad Nacional de Colombia
Publication date:
2026-04-05
DOI:
10.1016/j.econlet.2026.112977
OpenAlex record:
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AI provenance: This post was generated by OpenAI. The original authors did not write or review this post.

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