Pricing of Liquidity Risks: Evidence from Multiple Liquidity Measures

45 Pages Posted: 25 Dec 2011 Last revised: 5 Mar 2014

See all articles by Soon-Ho Kim

Soon-Ho Kim

Korea University Business School (KUBS)

Kuan-Hui Lee

Seoul National University Business School

Date Written: June 19, 2013

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

JEL Classification: G11, G12

Suggested Citation

Kim, Soon-Ho and Lee, Kuan-Hui, Pricing of Liquidity Risks: Evidence from Multiple Liquidity Measures (June 19, 2013). Published at the Journal of Empirical Finance, Vol. 25, 112-133, 2014, Available at SSRN: https://ssrn.com/abstract=1976223 or http://dx.doi.org/10.2139/ssrn.1976223

Soon-Ho Kim

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

Kuan-Hui Lee (Contact Author)

Seoul National University Business School ( email )

703 LG-bldg, Business School,
Seoul National Univ., 1 Kwanak-Ro, Kwanak-Gu
Seoul, 151-916
Korea, Republic of (South Korea)
+82 2 880-6924 (Phone)

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