What is it about?
Using conditional version of liquidity-adjusted capital asset pricing model (LCAPM), we estimate the time-varying liquidity risk premium. The three dimensions of total liquidity risk are estimated separately to see which dimension of liquidity is more significantly priced in Helsinki stock exchange.
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Why is it important?
It explains one of the most important source of security returns in thinly traded stock market. The most illiquid stocks generate significantly higher total returns when compared to most liquid stocks. This finding provides opportunity for portfolio managers to optimize their portfolio weights to get best risk-return trade-off.
Perspectives
The study is relevant to most of the empirical analyses of stock market risks. The time-varying nature of a risk provides better understanding of the markets than static estimation of a risk which is commonly based on a certain historical time period. The conditionality in estimation is a prolific factor that helps to understand the time-varying nature of systematic risks in stock markets.
Dr Sheraz Ahmed
Lappeenrannan Teknillinen Yliopisto
Read the Original
This page is a summary of: Pricing of time-varying liquidity risk in Finnish stock market: new evidence, European Journal of Finance, February 2019, Taylor & Francis,
DOI: 10.1080/1351847x.2019.1577746.
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