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Volume 19, Number 3 / September 2015 , Pages 149-221
 
Multinational Finance Journal, 2015, vol. 19, no. 3, pp. 149-168
Yakov Amihud , NYU-Stern, USA    Corresponding Author
Haim Mendelson , Stanford University, USA

Abstract:
This paper reviews research on the effects of different measures of liquidity on asset prices. The foundation is the pricing of liquidity as an asset characteristic that began with the theoretical model and empirical evidence of Amihud and Mendelson (1986). The positive relation between expected returns on financial assets and the illiquidity of these assets has since been reconfirmed both in the U.S. and worldwide. The positive relation between illiquidity and expected return gives rise to research on the effect of liquidity-related systematic risk. Two types of such risk are shown to be priced: exposure to shocks in market liquidity and exposure to the market illiquidity return premium. The pricing of these risks is stronger in times of greater funding illiquidity and economic stress.

Keywords : liquidity; asset pricing; system risk; Amihud measure
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Multinational Finance Journal, 2015, vol. 19, no. 3, pp. 169-221
Lorne Switzer , Concordia University, Canada    Corresponding Author
Alan Picard , Concordia University, Canada

Abstract:
This paper re-examines the link between idiosyncratic risk and expected returns for a large sample of firms in both developed and emerging markets. Recent studies using Fama-French three-factor models have shown a negative relationship between idiosyncratic volatility and expected returns for developed markets. This relationship has not been studied to date for emerging markets. This study relates the current-month’s idiosyncratic volatility to the subsequent month’s stock returns for a sample of both developed and emerging markets expanding benchmark factors by including both a momentum and a systematic liquidity risk component. Using a five-factor model, the results suggest that idiosyncratic risk does not play a role on stock returns for most of the developed markets analyzed. In contrast, the paper shows, for the first time, that idiosyncratic risk is positively related to month-ahead expected returns for many emerging markets for this model.

Keywords : idiosyncratic volatility; expected returns; developed vs. emerging markets; asset pricing; multifactor models
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