Departmental Seminar

30/12/2014 - 14:00

Prof. Yakov Amihud New York University - Stern School of Business   Title: The Pricing of the Illiquidity Factor's Systematic Risk




This paper presents a liquidity factor IML, the return on illiquid-minus-liquid stock portfolios. The IML, adjusted for the common risk factors, measures the illiquidity premium whose annual alpha is about 4% over the period 1950-2012. I then test whether the systematic risk (β) of IML is priced in a multi-factor CAPM. The model allows for a conditional β of IML that rises with observable funding illiquidity and adverse market conditions. The conditional IML β is positively and significantly priced, and remains so after controlling for the beta of illiquidity shocks.