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The World Price of Liquidity Risk

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  • Lee, Kuan-Hui

    (2005-11)

Abstract

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.

Suggested Citation

  • Lee, Kuan-Hui, 2005. "The World Price of Liquidity Risk," Working Paper Series 2006-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2006-10
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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2006/2006-10.pdf
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    References listed on IDEAS

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    Cited by:

    1. Geoff Willis, 2011. "Pricing, liquidity and the control of dynamic systems in finance and economics," Papers 1105.5503, arXiv.org.
    2. Geoff Willis, 2011. "Why Money Trickles Up - Wealth & Income Distributions," Papers 1105.2122, arXiv.org, revised May 2011.
    3. Emilios C. Galariotis & Evangelos Giouvris, 2007. "Liquidity Commonality in the London Stock Exchange," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 374-388, January.
    4. Mehmet Dicle & John Levendis, 2014. "The day-of-the-week effect revisited: international evidence," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(3), pages 407-437, July.
    5. Jieun Lee & Kee H. Chung, 2015. "Foreign Ownership, Legal System and Stock Market Liquidity," Working Papers 2015-15, Economic Research Institute, Bank of Korea.

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