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Stock returns with consumption and illiquidity risks

  • Márquez, Elena
  • Nieto, Belén
  • Rubio, Gonzalo
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    This paper derives closed-form expressions for consumption-based stochastic discount factors adjusted by market-wide illiquidity shocks, considering both contemporaneous and ultimate consumption risk. We find that market-wide illiquidity risk is important for pricing risky assets under alternative preference specifications, although it is especially relevant when we allow for ultimate consumption risk. We also find a large and highly significant illiquidity risk premium for the first quarter of the year suggesting a time-varying behavior of the market-wide illiquidity premium.

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    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 29 (2014)
    Issue (Month): C ()
    Pages: 57-74

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    Handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:57-74
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