Is Liquidity Risk Priced in Partially Segmented Markets?

54 Pages Posted: 18 Jan 2018 Last revised: 4 Jun 2018

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: October 31, 2017

Abstract

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

Chaieb, Ines and Errunza, Vihang R. and Langlois, Hugues, Is Liquidity Risk Priced in Partially Segmented Markets? (October 31, 2017). Swiss Finance Institute Research Paper No. 18-05; HEC Paris Research Paper No. FIN-2018-1254. 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, 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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