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Liquidity-adjusted conditional capital asset pricing model

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  • Wang, Jinan
  • Chen, Langnan
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    Abstract

    This paper derives a liquidity-adjusted conditional two-moment capital asset pricing model (CAPM) and a liquidity-adjusted conditional three-moment CAPM respectively based on theory of stochastic discount factor. The liquidity-adjusted conditional two-moment CAPM shows that a security's conditional expected excess return consists of three parts: its conditional expected liquidity cost, the systemic risk premium and the liquidity risk premium. The liquidity-adjusted conditional three-moment CAPM shows that a security's conditional expected excess return depends on its conditional expected liquidity cost, the conditional covariance between its return and the market return, the conditional covariance between its liquidity cost and the market liquidity cost, and the conditional coskewness of its return and the market return.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999311002707
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    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 2 ()
    Pages: 361-368

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    Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:361-368
    DOI: 10.1016/j.econmod.2011.11.007
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

    Keywords: CAPM; Liquidity; Liquidity risk; Conditional coskewness;

    Find related papers by JEL classification:

    • G0 - Financial Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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    Cited by:

    1. Czauderna, Katrin & Riedel, Christoph & Wagner, Niklas, 2015. "Liquidity and conditional market returns: Evidence from German exchange traded funds," Economic Modelling, Elsevier, vol. 51(C), pages 454-459.

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