Transaction Costs, Liquidity Risk, and the CCAPM

Liu, Weimin; Luo, Di; Zhao, Huainan

doi:10.2139/ssrn.2459870

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Transaction Costs, Liquidity Risk, and the CCAPM

54 Pages Posted: 28 Jun 2014 Last revised: 15 Sep 2015

See all articles by Weimin Liu

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: September 14, 2015

Abstract

In this paper, we make a liquidity adjustment to the consumption-based capital asset pricing model (CCAPM) and show that the liquidity-adjusted CCAPM is a generalized model of Acharya and Pedersen (2005). Using different proxies for transaction costs such as the effective trading costs measure of Hasbrouck (2009) and the bid-ask spread estimates of Corwin and Schultz (2012), we find that the liquidity-adjusted CCAPM explains a larger fraction of the cross-sectional return variations.

Keywords: Transaction costs; Liquidity risk; Consumption-based asset pricing

JEL Classification: G12; G14

Suggested Citation: Suggested Citation

Liu, Weimin and Luo, Di and Zhao, Huainan, Transaction Costs, Liquidity Risk, and the CCAPM (September 14, 2015). Available at SSRN: https://ssrn.com/abstract=2459870 or http://dx.doi.org/10.2139/ssrn.2459870