The Pricing of Liquidity Factors

50 Pages Posted: 15 Apr 2024 Last revised: 28 Apr 2024

See all articles by Sanghyun Hong

Sanghyun Hong

University of Canterbury - Economics and Finance

Kee H. Chung

State University of New York at Buffalo - School of Management

Date Written: March 30, 2024

Abstract

This paper examines the pricing of liquidity factors and the performance of liquidity-augmented factor models. Using the 1963-2023 US stock market data, we construct six liquidity factors based on liquidity costs (LIQ), liquidity commonality risk (COM), return sensitivity to market liquidity (RML), liquidity sensitivity to market return (LMR), liquidity sensitivity to market uncertainty (LMU), and liquidity sensitivity to macroeconomic shocks (LME). Of these factors, LIQ, COM, and LMU capture additional dimensions of risks that the Fama-French factors do not. We show that asset pricing models with a liquidity factor perform better than those with the size factor (SMB).

Keywords: JEL classification: G11, G12, G14 Liquidity, Asset pricing, Size effect, Fama-French factors, Risk-adjusted returns

JEL Classification: G11, G12, G14

Suggested Citation

Hong, Sanghyun and Chung, Kee H., The Pricing of Liquidity Factors (March 30, 2024). Available at SSRN: https://ssrn.com/abstract=4779075 or http://dx.doi.org/10.2139/ssrn.4779075

Sanghyun Hong

University of Canterbury - Economics and Finance ( email )

Private Bag 4800
Christchurch
New Zealand

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

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