Analyzing the Nonlinear Pricing of Liquidity Risk according to the Market State

Helena Chuliá, Christoph Koser and Jorge Uribe

Finance Research Letters, 2021, vol. 38, issue C

Abstract: This study examines the asymmetric impact of systemic liquidity on asset prices across market states. We use time-series conditional quantile regressions to estimate an otherwise traditional liquidity-augmented three-factor model for asset prices. We find the exposure of equity returns to systemic liquidity risk to be dependent on the market state. Contrary to general assumptions, our results show that liquidity is not always a relevant factor for explaining stock market returns and that it only becomes relevant when the market state is particularly good or particularly bad. Search-for-yield and flight-to-liquidity considerations help to explain our findings.

Keywords: Systemic liquidity; Asset prices; Market state; Time-series quantile regression (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:38:y:2021:i:c:s1544612320300933

DOI: 10.1016/j.frl.2020.101515

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