Empirical Test on the Liquidity-Adjusted Capital Asset Pricing Model

30 Pages Posted: 30 Jan 2014 Last revised: 30 Mar 2021

See all articles by Van Hoang Vu

Van Hoang Vu

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing

Daniel Chai

Monash University

Viet Do

Monash University - Department of Accounting; Financial Research Network (FIRN)

Date Written: May 31, 2014

Abstract

In this study, we examine the effects of systematic liquidity risk on stock returns in the Australian market. We find that liquidity risk, in the form of (i) the co-movement between individual stock liquidity and market liquidity, (ii) the co-movement between stock returns and market liquidity, and (iii) the co-movement between stock liquidity and market returns, is priced individually and jointly in Australian equities. The results are robust to the use of alternative liquidity proxies and after controlling for other factors that are known to affect stock returns. The analysis across different market conditions shows that the net liquidity risk is approximately eight times higher in bearish markets than in bullish markets. Our overall results support the importance of liquidity risk in the generation of stock returns, particularly during market downturns.

Keywords: Liquidity; Liquidity risk; Asset pricing; Asymmetric Liquidity Risk.

Suggested Citation

Vu, Van Hoang and Chai, Daniel and Do, Minh Viet, Empirical Test on the Liquidity-Adjusted Capital Asset Pricing Model (May 31, 2014). 2014 Financial Markets & Corporate Governance Conference, Pacific-Basin Finance Journal, Vol. 35, 2015, Available at SSRN: https://ssrn.com/abstract=2388035 or http://dx.doi.org/10.2139/ssrn.2388035

Van Hoang Vu (Contact Author)

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Daniel Chai

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Minh Viet Do

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
295
Abstract Views
2,052
Rank
193,983
PlumX Metrics