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Systematic Liquidity Risk Premia

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Abstract

This paper examines the β4 liquidity risk premium documented in Acharya and Pedersen (2005). We decompose this premium into two components: the covariation of liquidity costs with (i) market dividend growth shocks and (ii) shocks to the variance of market returns. In 1963-2017 US stock market data, the former is approximately three times larger than the latter. Liquidity volatility is primarily incorporated in stock prices via its common variation with business, rather than financial, shocks.

Suggested Citation

  • Glenn Boyle & Sanghyun Hong, 2020. "Systematic Liquidity Risk Premia," Working Papers in Economics 20/15, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:20/15
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    1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    2. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
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    More about this item

    Keywords

    Liquidity Risk; Asset Pricing;

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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