Empirical tests on the asset pricing model with liquidity risk: An unobserved components approach |
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| Institution: | 1. University of Rennes 1, France;2. ESSCA School of Management, France;1. Konkuk University, Department of Business Administration, 120 Neungdong-ro, Gwangjin-gu, Seoul, 05029, South Korea;2. Korea Housing & Urban Guarantee Corporation, 10F, BIFC, Munhyeongeumyungro 40, Nam-gu, Busan, 48400, South Korea;1. Universidad de Zaragoza, Spain;2. Banco de España, Spain;1. School of Business, East China University of Science and Technology, 130 Meilong Road, Shanghai 200237, China;2. Department of Finance, East China University of Science and Technology, Shanghai 200237, China;3. Department of Economics, University of Waterloo, 200 University Avenue West, Ontario, N2L 3G1, Canada;1. Department of Economics, Tunghai University, No. 1727, Sec. 4, Xitun Dist., Taiwan Boulevard, Taichung, 40704, Taiwan;2. Department of Accounting, Feng Chia University, Taiwan;1. Department of Economics, 364 FCBE, University of Memphis, Memphis, TN 38152, USA;2. Department of Economics, 432 FAB, University of Memphis, Memphis, TN 38152, USA |
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| Abstract: | The aim of this paper is to test empirically the conditional liquidity-adjusted capital asset pricing model (L-CAPM) developed by Acharya and Pedersen (2005). Accordingly, we propose to estimate the L-CAPM using unobserved components methodology, which allows us to take into account the main stylized facts characterizing liquidity. Based on a sample of firms listed on the NASDAQ, our empirical analysis reveals several findings. Firstly, we show that liquidity is time-varying and exhibits strong seasonality. Secondly, we highlight the impact of the liquidity level premium on asset prices. Thirdly, we show that the most important liquidity risk is related to the covariance between portfolio illiquidity and market returns. Fourthly, we observe a negative relationship between portfolio returns and market illiquidity. Fifthly, we find that liquidity risk and illiquidity level are not always positively correlated. |
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| Keywords: | Liquidity risk Liquidity premium Conditional liquidity-adjusted CAPM Unobserved components models G1 G12 |
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