Journal of Banking & Finance Vol. 37 No. 11 2013
The components of the illiquidity premium: An empirical analysis of US stocks 1927–2010
Abstract
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.
- DOI
- 10.1016/j.jbankfin.2013.01.029
- Volume
- 37
- Issue
- 11
- Pages
- 4476-4487
- Language
- en
- Sources
- crossref openalex bibtex:phds-export.bib