Skip to main content

Lund University Publications

LUND UNIVERSITY LIBRARIES

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)
Please use this url to cite or link to this publication:
author
; and
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
2016-04-01 11:09:07
date last changed
2022-04-28 07:43:59
@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}},
  keywords     = {{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}},
  doi          = {{10.1016/j.jbankfin.2013.01.029}},
  volume       = {{37}},
  year         = {{2013}},
}