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The world price of liquidity risk

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  • Lee, Kuan-Hui
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    Abstract

    This paper empirically tests the liquidity-adjusted capital asset pricing model of Acharya and Pedersen (2005) on a global level. Consistent with the model, I find evidence that liquidity risks are priced independently of market risk in international financial markets. That is, a security's required rate of return depends on the covariance of its own liquidity with aggregate local market liquidity, as well as the covariance of its own liquidity with local and global market returns. I also show that the US market is an important driving force of global liquidity risk. Furthermore, I find that the pricing of liquidity risk varies across countries according to geographic, economic, and political environments. The findings show that the systematic dimension of liquidity provides implications for international portfolio diversification.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 99 (2011)
    Issue (Month): 1 (January)
    Pages: 136-161

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    Handle: RePEc:eee:jfinec:v:99:y:2011:i:1:p:136-161

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Asset pricing International finance Liquidity Liquidity risk Liquidity-adjusted capital asset pricing model Commonality in liquidity Market integration Market segmentation Mildly segmented market Zero return Emerging market Developed market;

    References

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    Cited by:
    1. Hagströmer, Björn & Nilsson, Birger & Hansson, Björn, 2011. "The components of the illiquidity premium: An empirical analysis of U.S. stocks 1927-2010," Working Papers 2011:24, Lund University, Department of Economics.
    2. Cécile Carpentier & Jean-Marc Suret, 2011. "L’escompte canadien : un réexamen," CIRANO Project Reports 2011rp-11, CIRANO.
    3. De Moor, Lieven & Sercu, Piet, 2011. "The Smallest Firm Effect: an International Study," Working Papers 2011/18, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    4. Andrikopoulos, Andreas & Angelidis, Timotheos & Skintzi, Vasiliki, 2012. "Illiquidity, return and risk in G7 stock markets: interdependencies and spillovers," MPRA Paper 40003, University Library of Munich, Germany.

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