The components of the illiquidity premium: An empirical analysis of U.S. stocks 1927-2010
(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:
https://lup.lub.lu.se/record/4204535
- author
- Hagstromer, Bjorn ; Hansson, Björn LU and Nilsson, Birger LU
- organization
- publishing date
- 2013
- 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}}, }