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The Cross Section of Expected Returns and Amortized Spreads

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Author Info

  • 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)

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    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.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

    Volume (Year): 09 (2006)
    Issue (Month): 04 ()
    Pages: 597-638

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    Handle: RePEc:wsi:rpbfmp:v:09:y:2006:i:04:p:597-638

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    Related research

    Keywords: Amortized spread; asset pricing; liquidity commonality; clientele effect; share turnover; JEL Classification: G11; JEL Classification: G12;

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    Cited by:
    1. Langnan Chen & Steven Li & Jinan Wang, 2011. "Liquidity, Skewness and Stock Returns: Evidence from Chinese Stock Market," Asia-Pacific Financial Markets, Springer, vol. 18(4), pages 405-427, November.
    2. Wang, Jinan & Chen, Langnan, 2012. "Liquidity-adjusted conditional capital asset pricing model," Economic Modelling, Elsevier, vol. 29(2), pages 361-368.

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