This paper presents a model of the joint behavior of liquidity and volatility. In the model, investors extrapolate recent price movements to forecast the volatility of a risky asset. When the perceived volatility is high, the risk premium is high, the current return on the risky asset is low,...

We document considerable return comovement associated with accruals after controlling for other common factors. An accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.16, higher than that of the market factor or the SMB and HML factors of Fama and French (1993). According to...