Asset Prices and Asset Correlations in Illiquid Markets
24 Pages Posted: 1 Dec 2004
Date Written: November 2004
Abstract
We build a new asset pricing framework to study the effects of aggregate illiquidity on asset prices, volatilities and correlations. The Black-Scholes economy is obtained in our framework as the limiting case of perfectly liquid markets. The model is consistent with empirical studies on the effects of illiquidity on asset returns, volatilities and correlations. We present the model, study its qualitative properties and estimate the stocks' sensitivities to aggregate liquidity (betas) using nine years data for 24 randomly sampled stocks traded on the NYSE. These sensitivity parameters (betas) determine the effect that aggregate illiquidity has on expected returns, volatilities, correlations, CAPM-betas and Sharpe ratios. We find clear capitalization and sector patterns for the liquidity betas.
Keywords: Market Liquidity, Volatilities, Correlations, Asset Pricing, GMM
JEL Classification: G12, G14, C30
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Is Information Risk a Determinant of Asset Returns?
By David Easley, Soeren Hvidkjaer, ...
-
By Tarun Chordia, Avanidhar Subrahmanyam, ...
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi
