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Pricing liquidity risk and cost in the stock market: How different was the financial crisis?

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  • Xue Han

    (Research and Analytical Services (RAS))

  • Zheng Jian

Abstract

Past literature has proven that liquidity plays a role in stock pricing, but our study shows that this role is remarkably bigger during an unstable period – the subprime crisis. The market became more sensitive to illiquidity costs and investors were paying a higher premium in crisis than in boom. This conclusion holds even when the overall illiquidity cost is divided into an expected part and an unexpected part. In contrast, while the market remained largely as sensitive to liquidity risk as before, liquidity risk itself, represented by the liquidity betas, changed remarkably in the crisis period compared to the prior boom period.

Suggested Citation

  • Xue Han & Zheng Jian, 2011. "Pricing liquidity risk and cost in the stock market: How different was the financial crisis?," Journal of Asset Management, Palgrave Macmillan, vol. 12(2), pages 109-122, June.
    • Handle: RePEc:pal:assmgt:v:12:y:2011:i:2:d:10.1057_jam.2010.26
    DOI: 10.1057/jam.2010.26
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    References listed on IDEAS

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