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http://hdl.handle.net/2451/26792
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| Title: | Asset Pricing with Liquidity Risk |
| Authors: | Acharya, Viral V.
Pedersen, Lasse Heje |
| Keywords: | Liquidity risk
Liquidity-adjusted CAPM
Flight to liquidity
Frictions
Transaction costs |
| Issue Date: | 11-Jun-2004 |
| Series/Report no.: | S-DRP-05-09 |
| Abstract: | This paper solves explicitly a simple equilibrium model with liquidity
risk. In our liquidityadjusted capital asset pricing model, a
security’s required return depends on its expected liquidity as
well as on the covariances of its own return and liquidity with the
market return and liquidity. In addition, a persistent negative shock to
a security’s liquidity results in low contemporaneous returns and
high predicted future returns. The model provides a unified framework
for understanding the various channels through which liquidity risk may
affect asset prices. Our empirical results shed light on the total and
relative economic significance of these channels and provide evidence of
flight to liquidity. r 2005 Elsevier B.V. All rights reserved. |
| URI: | http://hdl.handle.net/2451/26792 |
| Appears in Collections: | Derivatives Research
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