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A novel measure of liquidity premium: application to the Korean stock market

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  • Seok-Kyun Hur
  • Chune Young Chung

Abstract

This study proposes a novel measure for an asset’s liquidity premium. Applying Brownian first-passage time distribution properties, we derive an explicit form of liquidity premium embedded in the asset price. Our liquidity premium measure is intuitive because it assesses the extent to which the value of the asset should be increased from the current market price if investors were allowed to retain the asset until they achieve an investment goal. This measure is readily available for assessing an asset’s liquidity because it does not require information on the asset’s transactional characteristics. Our empirical experiment using Korean stock market data suggests that the liquidity premium in this study is inversely related to Amihud’s (2002) illiquidity ratio, which is commonly used to measure stocks’ illiquidity.

Suggested Citation

  • Seok-Kyun Hur & Chune Young Chung, 2018. "A novel measure of liquidity premium: application to the Korean stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 25(3), pages 211-215, February.
    • Handle: RePEc:taf:apeclt:v:25:y:2018:i:3:p:211-215
    DOI: 10.1080/13504851.2017.1324608
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    Cited by:

    1. Seok-Kyun Hur & Chune Young Chung & Chang Liu, 2018. "Is Liquidity Risk Priced? Theory and Evidence," Sustainability, MDPI, vol. 10(6), pages 1-13, May.
    2. Tihana Škrinjarić & Boško Šego, 2018. "Using Grey Incidence Analysis Approach in Portfolio Selection," IJFS, MDPI, vol. 7(1), pages 1-16, December.
    3. Radosław Pastusiak & Jakub Keller & Michał Radke, 2020. "Marketability Discount in Various Economic Environments. Comparison of Developed and Emerging Markets on the Example of the USA and Poland," JRFM, MDPI, vol. 13(6), pages 1-15, June.

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