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Transaction costs, liquidity risk, and the CCAPM

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  • Liu, Weimin
  • Luo, Di
  • Zhao, Huainan

Abstract

In this paper, we make a liquidity adjustment to the consumption-based capital asset pricing model (CCAPM) and show that the liquidity-adjusted CCAPM is a generalized model of Acharya and Pedersen (2005). Using different proxies for transaction costs such as the effective trading costs measure of Hasbrouck (2009) and the bid-ask spread estimates of Corwin and Schultz (2012), we find that the liquidity-adjusted CCAPM explains a larger fraction of the cross-sectional return variations.

Suggested Citation

  • Liu, Weimin & Luo, Di & Zhao, Huainan, 2016. "Transaction costs, liquidity risk, and the CCAPM," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 126-145.
    • Handle: RePEc:eee:jbfina:v:63:y:2016:i:c:p:126-145
    DOI: 10.1016/j.jbankfin.2015.11.011
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    More about this item

    Keywords

    G12; G14; Transaction costs; Liquidity risk; Consumption-based asset pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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