The pricing of systematic liquidity risk: Empirical evidence from the US stock market |
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| Institution: | 1. The Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia PA 19104, United States;2. Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, 211 West Huaihai Road, Shanghai 200030, China;3. Wharton Financial Institutions Center, University of Pennsylvania, USA;4. NBER, United States;1. Department of Banking and Finance, University of Zurich, Switzerland;2. Institute for Management Research, Radboud University, Nijmegen, Switzerland;1. School of Securities and Futures, Southwestern University of Finance and Economics, Chengdu 611130, China;2. Peking University HSBC Business School, Shenzhen 518055, China |
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| Abstract: | In this study, we examine whether aggregate market liquidity risk is priced in the US stock market. We define a bivariate Garch (1,1)-in-mean specification for the market portfolio excess returns and the changes in the standardized number of shares in the S&P 500 Index, the aggregate market liquidity proxy. The findings, based on monthly data, suggest that systematic liquidity risk is priced in the US over the period January 1973–December 1997. The liquidity premium represents a non-negligible, negative and time-varying component of the total market risk premium whose magnitude is not influenced by the October’87 Crash. |
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