Asset Pricing with Liquidity Risk

58 Pages Posted: 28 Jan 2003

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 7 versions of this paper

Date Written: January 2, 2003

Abstract

This paper studies equilibrium asset pricing with liquidity risk - the risk arising from unpredictable changes in liquidity over time. It is shown that a security's required return depends on its expected illiquidity and on the covariances of its own return and illiquidity with market return and market illiquidity. This gives rise to a liquidity-adjusted capital asset pricing model. Further, if a security's liquidity is persistent, a shock to its illiquidity results in low contemporaneous returns and high predicted future returns. Empirical evidence based on cross-sectional tests is consistent with liquidity risk being priced.

Keywords: liquidity risk, asset pricing

JEL Classification: G1, G12

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Pedersen, Lasse Heje, Asset Pricing with Liquidity Risk (January 2, 2003). Available at SSRN: https://ssrn.com/abstract=366300 or http://dx.doi.org/10.2139/ssrn.366300

Viral V. Acharya

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New York University (NYU) ( email )

Stern School of Business
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United Kingdom