Stock returns with consumption and illiquidity risks

Elena Márquez, Belén Nieto and Gonzalo Rubio

International Review of Economics & Finance, 2014, vol. 29, issue C, 57-74

Abstract: This paper derives closed-form expressions for consumption-based stochastic discount factors adjusted by market-wide illiquidity shocks, considering both contemporaneous and ultimate consumption risk. We find that market-wide illiquidity risk is important for pricing risky assets under alternative preference specifications, although it is especially relevant when we allow for ultimate consumption risk. We also find a large and highly significant illiquidity risk premium for the first quarter of the year suggesting a time-varying behavior of the market-wide illiquidity premium.

Keywords: Stochastic discount factor; Ultimate consumption risk; Market-wide liquidity; Illiquidity premium (search for similar items in EconPapers)
JEL-codes: E44 G10 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:29:y:2014:i:c:p:57-74

DOI: 10.1016/j.iref.2013.04.003

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