Title: The Pricing of Growth Opportunity and Stock Market Liquidity
Abstract: This study presents a simple asset pricing model with liquidity, short-run earnings growth, and long-run growth opportunity as risk factors and with the presence of transaction costs. The model provides a framework for understanding the channel through stock market liquidity affects asset prices by aligning growth opportunity. Empirical results suggest that the return sensitivity to growth and liquidity sensitivity to growth appear to be the most important sources of risks in determining the asset prices. Furthermore, the Granger causality test suggests the systematic liquidity variation through the business cycle is related to the growth opportunity. Liquid stock recover faster than illiquid stocks in response to the upcoming growth opportunity by the end of market downturns and therefore illiquid stocks that are unable to respond to growth opportunity are riskier in face of market shocks. Overall, the findings of this paper shed light on a new channel which liquidity risk affect asset prices and complement the mechanism of “flight to quality”.
Publication Year: 2012
Publication Date: 2012-01-01
Language: en
Type: article
Indexed In: ['crossref']
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