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Asian Review of Financial Research, Vol., No..
pp.1270~1313
pp.1270~1313
Liquidity Risk and Expected Stock Returns in Korea : A New Approach
Jeewon Jang College of Business, Korea Advanced Institute of Science and Technology (KAIST), Seoul, Korea
Jangkoo Kang Graduate School of Finance & Accounting, College of Business, Korea Advanced Institute of Science and Technology (KAIST), Seoul, Korea
Changjun Lee College of Business Administration, Hankuk University of Foreign Studies, 270 Imun-dong, Dongdaemun-Gu, Seoul, Korea
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 well explains the cross-section of stock returns in Korea during 1987~2010, describing the liquidity premium, size and value effects that the CAPM and Fama-French 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-Asian financial crisis period.
Jeewon Jang
Jangkoo Kang
Changjun Lee
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 well explains the cross-section of stock returns in Korea during 1987~2010, describing the liquidity premium, size and value effects that the CAPM and Fama-French 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-Asian financial crisis period.