Pricing liquidity risk and cost in the stock market: How different was the financial crisis?

Xue Han () and Zheng Jian
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Xue Han: Research and Analytical Services (RAS)

Journal of Asset Management, 2011, vol. 12, issue 2, No 3, 109-122

Abstract: Abstract Past literature has proven that liquidity plays a role in stock pricing, but our study shows that this role is remarkably bigger during an unstable period – the subprime crisis. The market became more sensitive to illiquidity costs and investors were paying a higher premium in crisis than in boom. This conclusion holds even when the overall illiquidity cost is divided into an expected part and an unexpected part. In contrast, while the market remained largely as sensitive to liquidity risk as before, liquidity risk itself, represented by the liquidity betas, changed remarkably in the crisis period compared to the prior boom period.

Keywords: illiquidity cost; liquidity risk; Liquidity-Adjusted CAPM; subprime crisis (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1057/jam.2010.26

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