Is Liquidity Risk Priced? Theory and Evidence

Seok-Kyun Hur, Chune Young Chung and Chang Liu
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Seok-Kyun Hur: School of Business Administration, College of Business and Economics, Chung-Ang University, 84 Heukseok-ro, Dongjak-gu, Seoul 06974, Korea
Chune Young Chung: School of Business Administration, College of Business and Economics, Chung-Ang University, 84 Heukseok-ro, Dongjak-gu, Seoul 06974, Korea
Chang Liu: College of Business, Hawaii Pacific University, 900 Fort Street Mall, Honolulu, HI 96813, USA

Sustainability, 2018, vol. 10, issue 6, 1-13

Abstract: This study studies a recently proposed measure of liquidity premium (or discount). Specifically, the liquidity premium we utilize is defined as a function of a time discount factor, a relative risk aversion parameter, and the expected return and volatility of the asset, given the risk-free rate. Using U.S. stock market data, our empirical results confirm that the proposed liquidity premium measure is largely comparable to that commonly used in existing studies. Our results also imply that a risk factor based on the liquidity premium measure not only explains cross-sectional stock returns, but also time-series excess returns on portfolios sorted on the commonly used liquidity measure. In addition, our study suggests that better understanding the liquidity risk leads to sustainable trading for investors.

Keywords: liquidity premium; uncertainty termination; investment horizon; Amihud’s illiquidity ratio; factor models (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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