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

Department of Economics, Finance and Marketing, La Trobe University

Daniel Chai

Monash University

Viet Minh 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, Viet Minh, 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)

Department of Economics, Finance and Marketing, La Trobe University ( email )

Melbourne, 3086
Australia

Daniel Chai

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Viet Minh 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

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