Citation

Discussion Paper Details

Please find the details for DP4718 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Asset Pricing with Liquidity Risk

Author(s): Viral V. Acharya and Lasse Heje Pedersen

Publication Date: October 2004

Keyword(s): asset pricing, frictions, liquidity, liquidity risk and transaction costs

Programme Area(s): Financial Economics

Abstract: This Paper solves explicitly a simple equilibrium asset pricing model with liquidity risk ? the risk arising from unpredictable changes in liquidity over time. In our liquidity-adjusted capital asset pricing model, a security?s required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with market return and market liquidity. In addition, the model shows how a negative shock to a security?s liquidity, if it is persistent, results in low contemporaneous returns and high predicted future returns. The model provides a simple, unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4718

Bibliographic Reference

Acharya, V and Pedersen, L. 2004. 'Asset Pricing with Liquidity Risk'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4718