How is Liquidity Priced in Global Markets?

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: 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