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

46 Pages Posted: 9 Sep 2016 Last revised: 15 Sep 2020

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: September 11, 2020

Abstract

We test the pricing of the conditional systematic risk (β) of IML, a traded liquidity factor of the return premium on illiquid-minus-liquid stocks, with its risk premium varying over time. We find a positive and significant risk premium on conditional IML β, which rises in times of financial distress, measured by the corporate bond yield spread or broker–dealer loans (including margin loans). The conditional IML β remains significantly priced across individual stocks after controlling for the unconditional and conditional βs of the Fama-French and Carhart factors, as well as some common liquidity-based factors.

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 (September 11, 2020). Journal of Financial Markets, Forthcoming, 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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