How is Liquidity Priced in Global Markets?
Forthcoming in Review of Financial Studies
67 Pages Posted: 18 Jan 2018 Last revised: 14 Aug 2020
Date Written: January 27, 2020
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
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