The Pricing of the Illiquidity Factor's Systematic Risk

47 Pages Posted: 9 Sep 2016 Last revised: 16 Dec 2018

See all articles by Yakov Amihud

Yakov Amihud

New York University - Stern School of Business

Joonki Noh

Case Western Reserve University - Department of Banking and Finance

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Date Written: December 15, 2018

Abstract

We test the pricing of the systematic risk (β) of a traded illiquidity factor, the return premium on illiquid-minus-liquid (IML) stock portfolios, whose risk-adjusted return is positive and significant. We find that the risk premium of IML β is significantly higher in times of expected financial and economic distress proxied by lagged corporate bond yield spread. We further find a positive and significant risk premium on conditional IML β which is higher in times of financial and economic distress measured by the corporate bond yield spread, TED spread, or loans made by broker–dealers (including margin loans). The premium on the conditional IML β remains positive and significant after controlling for other popular liquidity-related factors’ βs and for firm characteristics, including illiquidity. In contrast, the pricing of the βs of other popular liquidity-related factors is insignificant.

Keywords: Illiquidity, Systematic Risk, Return Premium, Conditional Beta, Funding Illiquidity

JEL Classification: G12, G10

Suggested Citation

Amihud, Yakov and Noh, Joonki, The Pricing of the Illiquidity Factor's Systematic Risk (December 15, 2018). Available at SSRN: https://ssrn.com/abstract=2835992 or http://dx.doi.org/10.2139/ssrn.2835992

Yakov Amihud (Contact Author)

New York University - Stern School of Business ( email )

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Joonki Noh

Case Western Reserve University - Department of Banking and Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3737 (Phone)

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