The Pricing of the Illiquidity Factor's Systematic Risk

30 Pages Posted: 21 Mar 2014

See all articles by Yakov Amihud

Yakov Amihud

New York University - Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 19, 2014

Abstract

This paper presents a liquidity factor IML, the return on illiquid-minus-liquid stock portfolios. The IML, adjusted for the common risk factors, measures the illiquidity premium whose annual alpha is about 4% over the period 1950-2012. I then test whether the systematic risk (β) of IML is priced in a multi-factor CAPM. The model allows for a conditional β of IML that rises with observable funding illiquidity and adverse market conditions. The conditional IML β is positively and significantly priced, and remains so after controlling for the beta of illiquidity shocks.

Keywords: Liquidity factor, illiquidity premium, liquidity systematic risk

JEL Classification: G12

Suggested Citation

Amihud, Yakov, The Pricing of the Illiquidity Factor's Systematic Risk (March 19, 2014). Available at SSRN: https://ssrn.com/abstract=2411856 or http://dx.doi.org/10.2139/ssrn.2411856

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New York University - Stern School of Business ( email )

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