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The Cross Section of Expected Returns and Amortized Spreads

Author

Listed:
  • Zhongzhi (Lawrence) He

    (Faculty of Business, Brock University, 500 Glenridge Ave., St. Catharines, ON, Canada, L2S 3A1, Canada)

  • Lawrence Kryzanowski

    (John Molson School of Business, Concordia University, 1455 De Maisonneuve Blvd. West, Montreal, QC, Canada, H3G 1M8, Canada)

Abstract

The cross-sectional relationship between expected returns and amortized spreads is studied in an overlapping-generations economy with an average investor. The commonality in liquidity is directly incorporated into the asset-pricing relation. In a static equilibrium, the amortized spread of an asset is related to its expected return through four channels; namely: the equilibrium zero-beta rate, the market risk premium, a level effect, and an incremental sensitivity effect. Although both are present over the entire period, their relative importance shifts from a significant level to a significant sensitivity effect from the earlier to most recent sub-period in the Canadian stock market.

Suggested Citation

  • Zhongzhi (Lawrence) He & Lawrence Kryzanowski, 2006. "The Cross Section of Expected Returns and Amortized Spreads," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(04), pages 597-638.
    • Handle: RePEc:wsi:rpbfmp:v:09:y:2006:i:04:n:s0219091506000872
    DOI: 10.1142/S0219091506000872
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    Citations

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    Cited by:

    1. Grillini, Stefano & Ozkan, Aydin & Sharma, Abhijit & Al Janabi, Mazin A.M., 2019. "Pricing of time-varying illiquidity within the Eurozone: Evidence using a Markov switching liquidity-adjusted capital asset pricing model," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 145-158.
    2. Wang, Jinan & Chen, Langnan, 2012. "Liquidity-adjusted conditional capital asset pricing model," Economic Modelling, Elsevier, vol. 29(2), pages 361-368.
    3. Langnan Chen & Steven Li & Jinan Wang, 2011. "Liquidity, Skewness and Stock Returns: Evidence from Chinese Stock Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 18(4), pages 405-427, November.

    More about this item

    Keywords

    Amortized spread; asset pricing; liquidity commonality; clientele effect; share turnover; JEL Classification: G11; JEL Classification: G12;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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