Asset Pricing with Liquidity Risk

Viral V. Acharya () and Lasse Heje Pedersen

No 4718, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper solves explicitly a simple equilibrium asset pricing model with liquidity risk – the risk arising from unpredictable changes in liquidity over time. In our liquidity-adjusted 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 market return and market liquidity. In addition, the model shows how a negative shock to a security’s liquidity, if it is persistent, results in low contemporaneous returns and high predicted future returns. The model provides a simple, 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.

Keywords: asset pricing; frictions; liquidity; liquidity risk; transaction costs (search for similar items in EconPapers)
JEL-codes: G00 G10 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-rmg
Date: 2004-10
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Related works:
Working Paper: Asset Pricing with Liquidity Risk (2004)
Working Paper: Asset Pricing with Liquidity Risk (2003)
Journal Article: Asset pricing with liquidity risk (2005)
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