Journal of Financial Economics 
Volume 99, Issue 1, January 2011, Pages 136–161

  

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Kuan-Hui Lee, (1), 
Korea University Business School, 518 LG-Posco, Anam-Dong, Seongbuk-Gu, Seoul 136-701, South Korea 
http://doi.org/10.1016/j.jfineco.2010.08.003 



Abstract 

This paper empirically tests the liquidity-adjusted capital asset pricing model of Acharya and Pedersen (2005) on a global level. Consistent with the model, I find evidence that liquidity risks are priced independently of market risk in international financial markets. That is, a security’s required rate of return depends on the covariance of its own liquidity with aggregate local market liquidity, as well as the covariance of its own liquidity with local and global market returns. I also show that the US market is an important driving force of global liquidity risk. Furthermore, I find that the pricing of liquidity risk varies across countries according to geographic, economic, and political environments. The findings show that the systematic dimension of liquidity provides implications for international portfolio diversification. 

JEL classification G12; G15; F36 

Keywords 

Asset pricing; 
International finance; 
Liquidity; 
Liquidity risk; 
Liquidity-adjusted capital asset pricing model; 
Commonality in liquidity; 
Market integration; 
Market segmentation; 
Mildly segmented market; Zero return; 
Emerging market; Developed market