A new method for estimating liquidity risk: Insights from a liquidity-adjusted CAPM framework

Vassilios G. Papavassiliou

doi:10.1016/j.intfin.2012.12.003

A new method for estimating liquidity risk: Insights from a liquidity-adjusted CAPM framework

Vassilios G. Papavassiliou

Queen's Business School (QBS)

Research output: Contribution to journal › Article › peer-review

14 Citations (Scopus)

974 Downloads (Pure)

Abstract

This paper proposes a new non-parametric method for estimating model-free, time-varying liquidity betas which builds on realized covariance and volatility theory. Working under a liquidity-adjusted CAPM framework we provide evidence that liquidity risk is a factor priced in the Greek stock market, mainly arising from the covariation of individual liquidity with local market liquidity, however, the level of liquidity seems to be an irrelevant variable in asset pricing. Our findings provide support to the notion that liquidity shocks transmitted across securities can cause market-wide effects and can have important implications for portfolio diversification strategies.

Original language	English
Pages (from-to)	184-197
Number of pages	14
Journal	Journal of International Financial Markets Institutions and Money
Volume	24
DOIs	https://doi.org/10.1016/j.intfin.2012.12.003
Publication status	Published - Apr 2013

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10.1016/j.intfin.2012.12.003

A new method for estimating liquidity risk: Insights from a liquidity-adjusted CAPM framework
This is the author’s version of a work that was accepted for publication in Journal of International Financial Markets, Institutions and Money. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Financial Markets, Institutions and Money, Vol. 24, 04/2013
Accepted author manuscript, 502 KB

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AB - This paper proposes a new non-parametric method for estimating model-free, time-varying liquidity betas which builds on realized covariance and volatility theory. Working under a liquidity-adjusted CAPM framework we provide evidence that liquidity risk is a factor priced in the Greek stock market, mainly arising from the covariation of individual liquidity with local market liquidity, however, the level of liquidity seems to be an irrelevant variable in asset pricing. Our findings provide support to the notion that liquidity shocks transmitted across securities can cause market-wide effects and can have important implications for portfolio diversification strategies.

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A new method for estimating liquidity risk: Insights from a liquidity-adjusted CAPM framework

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