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The World Price of Liquidity Risk

  • Lee, Kuan-Hui

    (2005-11)

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    This paper specifies and tests an equilibrium asset pricing model with liquidity risk at the global level. The analysis encompasses 25,000 individual stocks from 48 developed and emerging countries around the world from 1988 to 2004. Though we cannot find evidence that the liquidity adjusted capital asset pricing model of Acharya and Pedersen (2005) holds in international financial markets, cross-sectional as well as time-series tests show that liquidity risks arising from the covariances of individual stocks' return and liquidity with local and global market factors are priced. Furthermore, we show that the US market is an important driving force of world-market liquidity risk. We interpret our evidence as consistent with an intertemporal capital asset pricing model (Merton (1973)) in which stochastic shocks to global liquidity serve as a priced state variable.

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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2006/2006-10.pdf
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    Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2006-10.

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    Date of creation: Nov 2005
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    Handle: RePEc:ecl:ohidic:2006-10
    Contact details of provider: Phone: (614) 292-8449
    Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
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