Asset Pricing with Liquidity Risk: A Replication and Out-of-Sample Tests with the Recent US and the Japanese Market Data

Performances of liquidity factors in the stock market cycle: evidence from the Tokyo Stock Exchange

“…Panel A of Table 5 shows the correlation between liquidity factors and other pricing factors in bull markets. Consistent with Kazumori et al (2019), the liquidity factors are generally correlated with high significance to the MKT factor in most cases. For example, in bull markets after 2000, the correlation between the PS (ILLIQ) and MKT factor is À0.73 and the correlation between the KP (Turn) and MKT factor is 0.66.…”

“…According to Kazumori et al (2019), liquidity risk has significant collinearity relationships with the market risk and the size risk, indicating that the liquidity risk is highly correlated with the market risk and the size risk. Therefore, it is necessary to estimate the correlations between liquidity factors and other risk factors during different market conditions because it aids in understanding the changes in liquidity factor performance throughout the market cycle.…”

“…For example, Paster and Stambaugh (2003) propose a four-factor capital asset pricing model to show that marketwide liquidity is an important state variable for asset pricing. However, some researchers argue that the significance of liquidity risk is statistically unstable and hard to interpret because there are severe collinearity relations among the liquidity risk, the market risk and the size risk (Kazumori et al, 2019). Therefore, by identifying the circumstances under which liquidity factors can make a significant contribution to the asset pricing model, investors and researchers can better understand the role of liquidity risk in asset pricing and describe the relationship between systematic risk and expected return for assets, so that they can select appropriate risk factors to explain and predict asset return in the future.…”

Economics with Market Liquidity Risk

“…Science does not progress based on anecdotes, so we are extremely grateful for extensive replications and extension by the two sets of authors, Holden and Nam (2019) and Kazumori, Fang, Sharman, Takeda, and Yu (2019), and for the release of the code by Holden and Nam (about 10,000 lines of code for the replication and another 5,000 for their extensions). This effort is clearly extensive and, while these papers do not get exactly the same results as each other, and neither exactly match our results, we think that they meaningfully add to the overall evidence on the pricing of market liquidity risk.…”

Analysis of the dynamic relationship between liquidity proxies and returns on the French CAC 40 index

“…The literature indicates that less liquid assets are allocated to investors with longer investment horizons and that the expected return on assets is an increasing function of illiquidity (Donadelli and Prosperi (2012)). However, counter-arguments are also present in the literature such as in Kazumori et al (2019), and Holden and Nam (2019). Therefore, given the divergent findings on the relationship between liquidity and returns, this relationship needs to be examined for the CAC 40 market.…”