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Liquidity Risk and Expected Stock Returns in Korea: A New Approach
Author(s) -
Jang Jeewon,
Kang Jangkoo,
Lee Changjun
Publication year - 2012
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12003
Subject(s) - market liquidity , liquidity risk , liquidity premium , stock (firearms) , capital asset pricing model , liquidity crisis , funding liquidity , economics , financial economics , factor analysis , econometrics , stock market , monetary economics , business , engineering , geography , mechanical engineering , context (archaeology) , archaeology
We propose a simple way to capture the multidimensionality of liquidity. Our analysis indicates that existing liquidity measures have considerable asset specific components, which justifies our new approach. Constructing a two‐factor model with the market and liquidity factor proposed in this paper, we find that our two‐factor model explains well the cross‐section of stock returns in K orea from 1987 to 2010, describing the liquidity premium, size and value effects that the CAPM and F ama‐ F rench three‐factor model fail to explain. Our results also show that the role of liquidity risk on expected stock returns is especially pronounced during the post‐ A sian financial crisis period.