How is Liquidity Priced in Global Markets?

67 Pages Posted: 18 Jan 2018 Last revised: 14 Aug 2020

See all articles by Ines Chaieb

Ines Chaieb

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Vihang R. Errunza

McGill University - Desautels Faculty of Management

Hugues Langlois

HEC Paris - Finance Department

Date Written: January 27, 2020

Abstract

We develop a new global asset pricing model to study how illiquidity interacts with market segmentation and investability constraints in 42 markets. Non-investable stocks that can only be held by foreign investors earn higher expected returns compared to freely investable stocks due to limited risk sharing and higher illiquidity. In addition to the world market premium, on average, developed and emerging market non-investables earn an annual unspanned local market risk premium of 1:17% and 9:04%, and a liquidity level premium of 1:06% and 2:39%, respectively. These results obtained in a conditional setup are robust to the choice of liquidity measure.

Keywords: International asset pricing, liquidity level, liquidity risk, transaction cost, emerging markets, market integration.

JEL Classification: G12, G15, F30, G20, G30

Suggested Citation

Chaieb, Ines and Errunza, Vihang R. and Langlois, Hugues, How is Liquidity Priced in Global Markets? (January 27, 2020). Swiss Finance Institute Research Paper No. 18-05, Paris December 2018 Finance Meeting EUROFIDAI - AFFI, HEC Paris Research Paper No. FIN-2018-1254, Forthcoming in Review of Financial Studies, Available at SSRN: https://ssrn.com/abstract=3103767 or http://dx.doi.org/10.2139/ssrn.3103767

Ines Chaieb (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland
+41223798568 (Phone)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Vihang R. Errunza

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-4056 (Phone)
514-398-3876 (Fax)

Hugues Langlois

HEC Paris - Finance Department ( email )

France

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