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How is Liquidity Priced in Global Markets?

Author

Listed:
  • Ines Chaieb
  • Vihang Errunza
  • Hugues Langlois
  • Andrew Karolyi

Abstract

We develop a new global asset pricing model to study how illiquidity interacts with market segmentation and investability constraints in 42 markets. Noninvestable stocks that can only be held by foreign investors earn higher expected returns compared to freely investable stocks due to limited risk sharing and higher illiquidity. In addition to the world market premium, on average, developed and emerging market noninvestables earn an annual unspanned local market risk premium of $1.17\%$ and $9.04\%$, and a liquidity level premium of $1.06\%$ and $2.39\%$, respectively. These results obtained in a conditional setup are robust to the choice of liquidity measure.

Suggested Citation

  • Ines Chaieb & Vihang Errunza & Hugues Langlois & Andrew Karolyi, 2021. "How is Liquidity Priced in Global Markets?," The Review of Financial Studies, Society for Financial Studies, vol. 34(9), pages 4216-4268.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:9:p:4216-4268.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa125
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F30 - International Economics - - International Finance - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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