Asset Pricing with Liquidity Risk
|Authors:||Acharya, Viral V.|
Pedersenz, Lasse Heje
|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|
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