TY - JOUR
T1 - Asset pricing with liquidity risk
T2 - A replication and out-of-sample tests with the recent US and the Japanese market data
AU - Kazumori, Eiichiro
AU - Fang, Fei
AU - Sharman, Raj
AU - Takeda, Fumiko
AU - Yu, Hong
N1 - Funding Information:
This paper is a part of “Tokyo Financial Research Data Services” project (available at http://park.itc.u-tokyo.ac.jp/TokyoFinance/) and Kazumori is thankful for the financial support of the Frontier Project of the Japanese Ministry of Economics, Trade, and Industry (2007, Grant No. 07131), Grants-in-Aid for Scientific Research (2008 to 2010, Grants No. 208032, 2053226, and 228026) from the Japan Society for the Promotion of Science, the Nomura Foundation (2009, 2016), the State University of New York Baldy Center for Law and Social Policy (2014 to 2016), and the National Science Foundation (2012 to 2013, Grant No. 1247988). Kazumori is responsible for the paper and for the project.
Publisher Copyright:
© 2019 Eiichiro Kazumori, Fei Fang, Raj Sharman, Fumiko Takeda and Hong Yu.
PY - 2019/12/17
Y1 - 2019/12/17
N2 - Acharya and Pedersen (2005, hereafter AP) develop the liquidity-adjusted CAPM (LCAPM) that assets with higher illiquidity costs, higher liquidity risk, and higher market risk have higher average rates of return. Our paper conducts an independent replication and two out-of-sample tests with three datasets (US 1964 to 1999, US 2000 to 2016, and Japan 1978 to 2012), six versions of the LCAPM, and eight test portfolios. We first consider the “one-variable LCAPM test” for the intercept, the illiquidity cost effect, and the net liquidity risk effect. We then consider the “two-variable LCAPM test” that further requires that the market risk premium and the net liquidity risk premium are identical as implied by the AP theory. The LCAPM satisfies the one-variable test in 36.0% of regressions and the two-variable test in 5.2% of regressions conducted using the US data. This result is qualitatively similar across US samples and is consistent with the findings of an independent study by Holden and Nam (2018). The LCAPM does not satisfy either of the two tests in the Japanese market.
AB - Acharya and Pedersen (2005, hereafter AP) develop the liquidity-adjusted CAPM (LCAPM) that assets with higher illiquidity costs, higher liquidity risk, and higher market risk have higher average rates of return. Our paper conducts an independent replication and two out-of-sample tests with three datasets (US 1964 to 1999, US 2000 to 2016, and Japan 1978 to 2012), six versions of the LCAPM, and eight test portfolios. We first consider the “one-variable LCAPM test” for the intercept, the illiquidity cost effect, and the net liquidity risk effect. We then consider the “two-variable LCAPM test” that further requires that the market risk premium and the net liquidity risk premium are identical as implied by the AP theory. The LCAPM satisfies the one-variable test in 36.0% of regressions and the two-variable test in 5.2% of regressions conducted using the US data. This result is qualitatively similar across US samples and is consistent with the findings of an independent study by Holden and Nam (2018). The LCAPM does not satisfy either of the two tests in the Japanese market.
KW - Asset pricing
KW - Liquidity
KW - Out-of-sample test
KW - Replication
UR - http://www.scopus.com/inward/record.url?scp=85076958890&partnerID=8YFLogxK
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U2 - 10.1561/104.00000072
DO - 10.1561/104.00000072
M3 - Article
AN - SCOPUS:85076958890
SN - 2164-5744
VL - 8
SP - 73
EP - 110
JO - Critical Finance Review
JF - Critical Finance Review
IS - 1-2
ER -