A new method for estimating liquidity risk: Insights from a liquidity-adjusted CAPM framework

Vassilios Papavassiliou

Journal of International Financial Markets, Institutions and Money, 2013, vol. 24, issue C, 184-197

Abstract: This paper proposes a new non-parametric method for estimating model-free, time-varying liquidity betas which builds on realized covariance and volatility theory. Working under a liquidity-adjusted CAPM framework we provide evidence that liquidity risk is a factor priced in the Greek stock market, mainly arising from the covariation of individual liquidity with local market liquidity, however, the level of liquidity seems to be an irrelevant variable in asset pricing. Our findings provide support to the notion that liquidity shocks transmitted across securities can cause market-wide effects and can have important implications for portfolio diversification strategies.

Keywords: Model-free liquidity betas; Liquidity-adjusted CAPM; High-frequency data; Realized betas (search for similar items in EconPapers)
JEL-codes: C14 G1 G12 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:24:y:2013:i:c:p:184-197

DOI: 10.1016/j.intfin.2012.12.003

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