How is Liquidity Priced in Global Markets?
68 Pages Posted: 18 Jan 2018 Last revised: 26 Feb 2020
Date Written: January 27, 2020
We develop a new global asset pricing model to study the joint impact of liquidity and investability constraints for 42 markets. On average, developed and emerging market stocks that can only be held locally are associated with an extra premium of 2.23% and 11.43%, attributed to liquidity level premium (LLP) of 1.06% and 2.39% and unspanned local market risk premium (LMRP) of 1.17% and 9.04%, respectively. While LLP and LMRP are two channels affecting the pricing of segmented stocks, they are differentially related to measures of information quality, sentiment, ownership, short selling, insider trading, and funding and market conditions.
Keywords: International asset pricing, liquidity level, liquidity risk, transaction cost, emerging markets, market integration.
JEL Classification: G12, G15, F30, G20, G30
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