Pricing of liquidity risks: Evidence from multiple liquidity measures |
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| Institution: | 1. Korea University Business School and National Pension Research Institute, South Korea;2. Seoul National University Business School, South Korea;1. LeBow College of Business, Drexel University, Philadelphia, PA 19104, United States;2. West Chester University, West Chester, PA 19383, United States;1. School of Economics, University of Seoul, 163 Seoulsiripdae-ro, Dongdaemun-gu, Seoul 02504, Republic of Korea;2. Securities·Derivatives R&D Center, Korea Exchange, 76, Yeouinaru-ro, Yeongdeungpo-gu, Seoul 07329, Republic of Korea |
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| 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. |
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