The Pricing of the Illiquidity Factor’s Conditional Risk with Time-varying Premium

45 Pages Posted: 9 Sep 2016 Last revised: 27 Feb 2019

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 21, 2019

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 time-varying being higher in times of expected financial distress. In our main analysis, we find a positive and significant risk premium on conditional IML β that rises in times of financial distress, measured by the corporate bond yield spread, TED spread, or broker–dealer loans (including margin loans). The positive pricing of the conditional IML β remains significant after controlling for the unconditional and conditional βs of other commonly used pricing factors and liquidity-based factors and for common firm characteristics, including size and illiquidity.

Keywords: Illiquidity, Systematic Risk, Time-varying Risk Premium, Conditional Beta, Funding Illiquidity

JEL Classification: G12, G10

Suggested Citation

Amihud, Yakov and Noh, Joonki, The Pricing of the Illiquidity Factor’s Conditional Risk with Time-varying Premium (February 21, 2019). 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 )

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Cleveland, OH 44106-7235
United States
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