Illusory Nature of Pricing of Illiquidity Risk: The Test Case of Australian Stock Market

38 Pages Posted: 17 Aug 2015

See all articles by Hilal Butt

Hilal Butt

University of Karachi - Institute of Business Administration (IBA), Karachi

Ihsan Badshah

Auckland University of Technology

Muhammad Tahir Suleman

School of Economics and Finance, Victoria University of Wellington

Date Written: August 17, 2015

Abstract

Positive illiquidity premium is documented to be linked with level and risk of illiquidity effect across global markets. Our study shows that this evidence is subject to variation from one measure of illiquidity to another with one potential implication. That the magnitude of illiquidity premium across global markets is less in previous studies, mainly because only one measure of illiquidity is implied. To elaborate this point the test case of Australian stock market is taken and likely strategy to determine the maximum illiquidity premium across the international markets is proposed. Further it is shown that stock based asset pricing tests are more appropriate to segregate level and risk of illiquidity effect.

Keywords: Asset pricing, Australian stock market, Illiquidity Premium, Illiquidity level, illiquidity risks, Illiquidity measures.

JEL Classification: G10, G12, G15

Suggested Citation

Butt, Hilal and Badshah, Ihsan and Suleman, Muhammad Tahir, Illusory Nature of Pricing of Illiquidity Risk: The Test Case of Australian Stock Market (August 17, 2015). Available at SSRN: https://ssrn.com/abstract=2645681

Hilal Butt (Contact Author)

University of Karachi - Institute of Business Administration (IBA), Karachi ( email )

University Road
Karachi, Sindh 75270
Pakistan

Ihsan Badshah

Auckland University of Technology ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand
+64 9 9219999 Extn: 5394 (Phone)
+64 9 219940 (Fax)

Muhammad Tahir Suleman

School of Economics and Finance, Victoria University of Wellington ( email )

PO.Box 600
New Zealand

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