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Pricing of liquidity risks: Evidence from multiple liquidity measures

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  • Kim, Soon-Ho
  • Lee, Kuan-Hui

Abstract

We investigate the pricing implication of liquidity risks in the liquidity-adjusted capital asset pricing model of Acharya and Pedersen (2005), using multiple liquidity measures and their principal component. While we find that the empirical results are sensitive to the liquidity measure used in the test, we find strong evidence of pricing of liquidity risks when we estimate liquidity risks based on the first principal component across eight measures of liquidity, both in the cross-sectional and factor-model regressions. Our finding implies that the systematic component measured by each liquidity proxy is correlated across measures and the shocks to the systematic and common component of liquidity are an undiversifiable source of risk.

Suggested Citation

  • Kim, Soon-Ho & Lee, Kuan-Hui, 2014. "Pricing of liquidity risks: Evidence from multiple liquidity measures," Journal of Empirical Finance, Elsevier, vol. 25(C), pages 112-133.
    • Handle: RePEc:eee:empfin:v:25:y:2014:i:c:p:112-133
    DOI: 10.1016/j.jempfin.2013.11.008
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    More about this item

    Keywords

    Liquidity; Liquidity-adjusted capital asset pricing model; Liquidity measure; Principal component analysis;
    All these keywords.

    JEL classification:

    • 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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