Pricing of liquidity risks: Evidence from multiple liquidity measures

Soon-Ho Kim and Kuan-Hui Lee

Journal of Empirical Finance, 2014, vol. 25, issue C, 112-133

Abstract: We investigate the pricing implication of liquidity risks in the liquidity-adjusted capital asset pricing model of Acharya and Pedersen (2005), using multiple liquidity measures and their principal component. While we find that the empirical results are sensitive to the liquidity measure used in the test, we find strong evidence of pricing of liquidity risks when we estimate liquidity risks based on the first principal component across eight measures of liquidity, both in the cross-sectional and factor-model regressions. Our finding implies that the systematic component measured by each liquidity proxy is correlated across measures and the shocks to the systematic and common component of liquidity are an undiversifiable source of risk.

Keywords: Liquidity; Liquidity-adjusted capital asset pricing model; Liquidity measure; Principal component analysis (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:25:y:2014:i:c:p:112-133

DOI: 10.1016/j.jempfin.2013.11.008

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