Is Liquidity Risk Priced in Partially Segmented Markets?
54 Pages Posted: 18 Jan 2018 Last revised: 4 Jun 2018
Date Written: October 31, 2017
We develop an asset pricing model to analyze the joint impact of liquidity costs and market segmentation. The freely traded securities command a premium for liquidity level and global market and liquidity risk premiums whereas securities that can only be held by a subset of investors additionally command a local market and liquidity risk premiums. Based on a new methodology, we find that the liquidity level premium dominates the liquidity risk premiums for our sample of 24 emerging markets. Whereas the local liquidity risk premium is empirically small, the global market liquidity risk premium dramatically increases during crises and market corrections.
Keywords: International asset pricing, liquidity risk, transaction cost, emerging markets, market integration.
JEL Classification: G12, G15, F30, G20, G30
Suggested Citation: Suggested Citation