The Components of the Illiquidity Premium: An Empirical Analysis of U.S. Stocks 1927-2010
2013 (English)In: Journal of Banking & Finance, ISSN 0378-4266, Vol. 37, no 11, 4476-4487 p.Article in journal (Refereed) Published
This paper implements a conditional version of the liquidity adjusted CAPM (LCAPM). The conditional LCAPM allows for a time-varying decomposition of the total illiquidity premium into a level component and three risk components. The estimated average annual total illiquidity premium for US stocks 1927–2010 is 1.74–2.08%, which is substantially lower than in most previous studies. The contributions from illiquidity level and illiquidity risk are 1.25–1.28% and 0.46–0.83%, respectively. Of the three illiquidity risk components, risk related to the hedging of wealth shocks is the most important, while commonality risk is the least important. The illiquidity premia are clearly time-varying, with peaks in downturns and crises, but with no general tendency to decrease over time. The level premium and the risk premium are significantly positively correlated, at around 0.35; indicating that in periods of turbulence both illiquidity cost and illiquidity risk premia tend to be high.
Place, publisher, year, edition, pages
Elsevier, 2013. Vol. 37, no 11, 4476-4487 p.
Illiquidity level premium, Illiquidity risk premium, Conditional LCAPM, Effective tick
IdentifiersURN: urn:nbn:se:su:diva-96301DOI: 10.1016/j.jbankfin.2013.01.029ISI: 000326212100035OAI: oai:DiVA.org:su-96301DiVA: diva2:665312
24th Australasian Finance and Banking Conference UNSW, Inst Global Finance, Sydney, AUSTRALIA DEC, 2011
FunderSwedish Research Council, 2009‐2210
AuthorCount: 3;2013-11-192013-11-192013-12-02Bibliographically approved