Asset Pricing with Downside Liquidity Risks

Management Science, Forthcoming

46 Pages Posted: 22 Dec 2012 Last revised: 24 Dec 2015

See all articles by Sean A. Anthonisz

Sean A. Anthonisz

The University of Sydney; Financial Research Network (FIRN)

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: December 22, 2015

Abstract

We develop a parsimonious liquidity-adjusted downside capital asset pricing model to investigate if phenomena such as downward liquidity spirals and flights to liquidity impact expected asset returns. We find strong empirical support for the model. Downside liquidity risk (sensitivity of stock liquidity to negative market returns) has an economically meaningful return premium that is ten times larger than its symmetric analogue. The expected liquidity level and downside market risk are also associated with meaningful return premiums. Downside liquidity risk and its associated premium are higher during periods of low market-wide liquidity, and for stocks that are relatively small, illiquid, volatile, and have high book-to-market ratios. These results are consistent with investors requiring compensation for holding assets susceptible to adverse liquidity phenomena. Our findings suggest that mitigation of downside liquidity risk can lower firms’ cost of capital.

Keywords: liquidity risk, liquidity spiral, conditional moment, pricing kernel, downside risk

JEL Classification: G12

Suggested Citation

Anthonisz, Sean Ashton and Putnins, Talis J., Asset Pricing with Downside Liquidity Risks (December 22, 2015). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2192336 or http://dx.doi.org/10.2139/ssrn.2192336

Sean Ashton Anthonisz

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

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