Pricing Liquidity Risk and Cost in the Stock Market: How Different Was the Financial Crisis?

14 Pages Posted: 30 Jun 2010

See all articles by Xue Han

Xue Han

Willis Towers Watson

Zheng Jian

Willis Towers Watson

Date Written: June 30, 2010

Abstract

Past literature has proven that liquidity plays a role in stock pricing, but our study shows that this role is remarkably bigger during an unstable period – the subprime crisis. The market became more sensitive to illiquidity costs and investors were paying a higher premium in crisis than in boom. This conclusion holds even when the overall illiquidity cost is divided into an expected part and an unexpected part. In contrast, while the market remained largely as sensitive to liquidity risk as before, liquidity risk itself, represented by the liquidity betas, changed remarkably in the crisis period compared to the prior boom period.

Keywords: Lliquidity Cost, Liquidity Risk, Liquidity-Adjusted CAPM, Subprime Crisis

Suggested Citation

Han, Xue and Jian, Zheng, Pricing Liquidity Risk and Cost in the Stock Market: How Different Was the Financial Crisis? (June 30, 2010). Towers Watson Technical Paper No. 1632969, Available at SSRN: https://ssrn.com/abstract=1632969 or http://dx.doi.org/10.2139/ssrn.1632969

Xue Han (Contact Author)

Willis Towers Watson ( email )

875 Third Avenue
New York, NY 10022
United States

Zheng Jian

Willis Towers Watson ( email )

875 Third Avenue
New York, NY 10022
United States

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