Skip navigation

Asset Pricing with Liquidity Risk

Authors: Acharya, Viral V.
Pedersenz, Lasse Heje
Issue Date: 17-Jul-2003
Series/Report no.: FIN-03-044
Abstract: This paper studies equilibrium asset pricing with liquidity risk | the risk arising from unpredictable changes in liquidity over time. It is shown that a security’s required return depends on its expected illiquidity and on the covariances of its own return and illiquidity with market return and market illiquidity. This gives rise to a liquidity- adjusted capital asset pricing model. Further, if a security’s liquidity is persistent, a shock to its illiquidity results in low contemporaneous returns and high predicted future returns. Empirical evidence based on cross-sectional tests is consistent with liquidity risk being priced.
Appears in Collections:Finance Working Papers

Files in This Item:
File Description SizeFormat 
wpa03044.pdf416.3 kBAdobe PDFView/Open

Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.