Adjusting the consumption-based capital asset pricing model by the estimate bid-ask spreads based on daily highest and lowest prices in Iran

Sedighe Alizadeh, Mohammad Nabi Shahiki Tash and Reza Roshan

Afro-Asian Journal of Finance and Accounting, 2021, vol. 11, issue 5, 718-739

Abstract: This study aims to investigate a capital asset pricing model (CAPM) based on consumption within the capital market in Iran, which is adjusted using transaction costs and liquidity risk. The study is carried out on twenty portfolios, formed on the basis of liquidity criteria using seasonal data from 2009 to 2018. In other words, this approach is applied to analyse the target pricing model through transaction costs proxy and evaluation of the portfolios. Exploiting the proposed bid-ask spread estimator as the transaction costs proxy shows that liquidity-adjusted CCAPM explains a bigger portion of cross-sectional return changes compared to the traditional CCAPM model. In addition, the results show that disregarding transaction costs and liquidity risk may lead to an inaccurate estimate of the expected return.

Keywords: traditional CCAPM; liquidity-adjusted CCAPM; liquidity risk; bid-ask spread; Iran. (search for similar items in EconPapers)
Date: 2021
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