TY  - JOUR
AU  - Acharya,Viral V.
AU  - Pedersen,Lasse Heje
TI  - Asset Pricing with Liquidity Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10814
PY  - 2004
Y2  - October 2004
UR  - http://www.nber.org/papers/w10814
L1  - http://www.nber.org/papers/w10814.pdf
N1  - Author contact info:
Viral V. Acharya
Stern School of Business
New York University
44 West 4th Street, Suite 9-84
New York, NY 10012
Tel: 212/998-0354
Fax: 212 995 4233
E-Mail: vacharya@stern.nyu.edu

Lasse H. Pedersen
NYU Stern Finance
44 West Fourth Street
Suite 9-190
New York, NY 10012
Tel: 212/998-0359
Fax: 212/995-4233
E-Mail: lpederse@stern.nyu.edu
AB  - This paper solves explicitly an equilibrium asset pricing model with liquidity risk -- the risk arising from unpredictable changes in liquidity over time. In our liquidity-adjusted capital asset pricing model, a security's required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with market return and market liquidity.  In addition, the model shows how a negative shock to a security's liquidity, if it is persistent, results in low contemporaneous returns and high predicted future returns. The model provides a simple, unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels.
ER  -