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Liquidity And Asset Pricing Under The Three-Moment Capm Paradigm

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  • Duong Nguyen
  • Suchismita Mishra
  • Arun Prakash
  • Dilip K. Ghosh

Abstract

We examine whether the use of the three-moment capital asset pricing model can account for liquidity risk. We also make a comparative analysis of a four-factor model based on Fama-French and Pástor-Stambaugh factors versus a model based solely on stock characteristics. Our findings suggest that neither of the models captures the liquidity premium nor do stock characteristics serve as proxies for liquidity. We also find that sensitivities of stock return to fluctuations in market liquidity do not subsume the effect of characteristic liquidity. Furthermore, our empirical findings are robust to differences in market microstructure or trading protocols between NYSE/AMEX and NASDAQ. 2007 The Southern Finance Association and the Southwestern Finance Association.

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Bibliographic Info

Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

Volume (Year): 30 (2007)
Issue (Month): 3 ()
Pages: 379-398

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Handle: RePEc:bla:jfnres:v:30:y:2007:i:3:p:379-398

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Web page: http://www.southwesternfinance.org/
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Cited by:
  1. Márcio André Veras Machado & Otávio Ribeiro de Medeiros, 2012. "Does the liquidity effect exist in the brazilian stock market?," Brazilian Business Review, Fucape Business School, vol. 9(4), pages 27-50, October.
  2. Lischewski, Judith & Voronkova, Svitlana, 2012. "Size, value and liquidity. Do They Really Matter on an Emerging Stock Market?," Emerging Markets Review, Elsevier, vol. 13(1), pages 8-25.
  3. Florackis, Chris & Gregoriou, Andros & Kostakis, Alexandros, 2011. "Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3335-3350.
  4. Lam, Keith S.K. & Tam, Lewis H.K., 2011. "Liquidity and asset pricing: Evidence from the Hong Kong stock market," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2217-2230, September.

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