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The components of the illiquidity premium: An empirical analysis of U.S. stocks 1927-2010

Hagstromer, Bjorn; Hansson, Björn LU and Nilsson, Birger LU (2013) In Journal of Banking & Finance 37(11). p.4476-4487
Abstract
This paper implements a conditional version of the liquidity adjusted CAPM (LCAPM). The conditional LCAPM allows for a time-varying decomposition of the total illiquidity premium into a level component and three risk components. The estimated average annual total illiquidity premium for US stocks 1927-2010 is 1.74%-2.08%, which is substantially lower than in most previous studies. The contributions from illiquidity level and illiquidity risk are 1.25%-1.28% and 0.46%-0.83%, respectively. Of the three illiquidity risk components, risk related to the hedging of wealth shocks is the most important, while commonality risk is the least important. The illiquidity premia are clearly time-varying, with peaks in downturns and crises, but with no... (More)
This paper implements a conditional version of the liquidity adjusted CAPM (LCAPM). The conditional LCAPM allows for a time-varying decomposition of the total illiquidity premium into a level component and three risk components. The estimated average annual total illiquidity premium for US stocks 1927-2010 is 1.74%-2.08%, which is substantially lower than in most previous studies. The contributions from illiquidity level and illiquidity risk are 1.25%-1.28% and 0.46%-0.83%, respectively. Of the three illiquidity risk components, risk related to the hedging of wealth shocks is the most important, while commonality risk is the least important. The illiquidity premia are clearly time-varying, with peaks in downturns and crises, but with no general tendency to decrease over time. The level premium and the risk premium are significantly positively correlated around 0.35; indicating that in periods of turbulence both illiquidity cost and illiquidity risk premia tend to be high. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Illiquidity level premium, Illiquidity risk premium, Conditional LCAPM, Effective tick
in
Journal of Banking & Finance
volume
37
issue
11
pages
4476 - 4487
publisher
Elsevier
external identifiers
  • wos:000326212100035
  • scopus:84884166638
ISSN
1872-6372
DOI
10.1016/j.jbankfin.2013.01.029
language
English
LU publication?
yes
id
54e7b29c-545e-4edd-8a89-9f93bc44b61d (old id 4204535)
date added to LUP
2014-01-07 12:58:35
date last changed
2019-05-14 01:44:02
@article{54e7b29c-545e-4edd-8a89-9f93bc44b61d,
  abstract     = {This paper implements a conditional version of the liquidity adjusted CAPM (LCAPM). The conditional LCAPM allows for a time-varying decomposition of the total illiquidity premium into a level component and three risk components. The estimated average annual total illiquidity premium for US stocks 1927-2010 is 1.74%-2.08%, which is substantially lower than in most previous studies. The contributions from illiquidity level and illiquidity risk are 1.25%-1.28% and 0.46%-0.83%, respectively. Of the three illiquidity risk components, risk related to the hedging of wealth shocks is the most important, while commonality risk is the least important. The illiquidity premia are clearly time-varying, with peaks in downturns and crises, but with no general tendency to decrease over time. The level premium and the risk premium are significantly positively correlated around 0.35; indicating that in periods of turbulence both illiquidity cost and illiquidity risk premia tend to be high.},
  author       = {Hagstromer, Bjorn and Hansson, Björn and Nilsson, Birger},
  issn         = {1872-6372},
  keyword      = {Illiquidity level premium,Illiquidity risk premium,Conditional LCAPM,Effective tick},
  language     = {eng},
  number       = {11},
  pages        = {4476--4487},
  publisher    = {Elsevier},
  series       = {Journal of Banking & Finance},
  title        = {The components of the illiquidity premium: An empirical analysis of U.S. stocks 1927-2010},
  url          = {http://dx.doi.org/10.1016/j.jbankfin.2013.01.029},
  volume       = {37},
  year         = {2013},
}