Stock Prices, Changes in Liquidity, and Liquidity Premia

50 Pages Posted: 6 Mar 2014 Last revised: 26 Jul 2018

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Bong‐Soo Lee

Florida State University

Hyun-Tak Lee

Risk Management Institute (RMI), National University of Singapore (NUS)

Date Written: July 3, 2018

Abstract

This paper develops a present value framework that reflects expectations of future changes in liquidity and liquidity premia. In our framework, a liquidity premium depends explicitly on prices, dividends, costs, and returns. We find that the liquidity premium for the CRSP market portfolio is significantly priced over short horizons, but its long-horizon evidence is not clear. The implication is that liquidity provides a natural trend for prices. Liquidity shocks are so transient that liquidity should be second order in the long run. We reconcile our findings with some theoretical debate over the importance of the liquidity premium for asset pricing.

Keywords: Asset pricing; Present value; VAR; Liquidity; Liquidity premium; Impulse response functions

JEL Classification: C12, C32, G12

Suggested Citation

Jang, Bong-Gyu and Lee, Bong Soo and Lee, Hyun-Tak, Stock Prices, Changes in Liquidity, and Liquidity Premia (July 3, 2018). Available at SSRN: https://ssrn.com/abstract=2404671 or http://dx.doi.org/10.2139/ssrn.2404671

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH) ( email )

77 Cheongam-ro
Pohang
Korea, Republic of (South Korea)

Bong Soo Lee

Florida State University ( email )

Tallahasse, FL 32306
United States

Hyun-Tak Lee (Contact Author)

Risk Management Institute (RMI), National University of Singapore (NUS) ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Register to save articles to
your library

Register

Paper statistics

Downloads
126
Abstract Views
974
rank
228,764
PlumX Metrics