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The pricing of the illiquidity factor’s conditional risk with time-varying premium

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  • Amihud, Yakov
  • Noh, Joonki

Abstract

We test the pricing of the conditional systematic risk (β) of IML, a traded liquidity factor of the return premium on illiquid-minus-liquid stocks, with its risk premium varying over time. We find a positive and significant risk premium on conditional βIML, which rises in times of financial distress, measured by the corporate bond yield spread or broker–dealer loans (including margin loans). The conditional βIML remains significantly priced across individual stocks after controlling for the unconditional and conditional βs of the Fama-French and Carhart factors, as well as some common liquidity-based factors.

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  • Amihud, Yakov & Noh, Joonki, 2021. "The pricing of the illiquidity factor’s conditional risk with time-varying premium," Journal of Financial Markets, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:finmar:v:56:y:2021:i:c:s1386418120300744
    DOI: 10.1016/j.finmar.2020.100605
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    2. Iwanaga, Yasuhiro & Hirose, Takehide, 2023. "Liquidity changes and decomposition in the Japanese equity market," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Illiquidity; Systematic risk; Time-varying risk premium; Conditional beta; Funding illiquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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