Asset Prices and Asset Correlations in Illiquid Markets
AbstractWe build a new asset pricing framework to study the effects of aggregate illiquidity on asset prices, volatilities and correlations. In our framework the Black-Scholes economy is obtained as the limiting case of perfectly liquid markets. The model is consistent with empirical studies on the effects of illiquidity on asset returns, volatilities and correlations. We present the model, study its qualitative properties and estimate stocks' sensitivities to aggregate liquidity ($\beta$s) using nine years data for 24 randomly sampled stocks traded on the NYSE. These sensitivity parameters ($\beta$s) determine the effect that aggregate illiquidity has on expected returns, volatilities, correlations, CAPM-betas and Sharpe ratios. We find clear capitalization and sector patterns for liquidity $\beta$s.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 288.
Date of creation: 2005
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Market Liquidity; Asset Pricing; Volatilities; Correlations; GMM;
Other versions of this item:
- Celso Brunetti & Alessio Caldarera, 2006. "Asset Prices and asset Correlations in Illiquid Markets," Computing in Economics and Finance 2006 331, Society for Computational Economics.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
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