Liquidity and asset prices : empirical analysis of the Norwegian stock market

Tazo, Alexander; Tazojeva, Heda
Master thesis
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URI
http://hdl.handle.net/11250/2612160
Date
2019
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Abstract
This thesis investigates time-varying characteristics of illiquidity and the pricing of its risk using

liquidity-adjusted capital asset pricing model(LCAPM). Collecting data from Norwegian stock

market between 1998 and 2017, we employ multivariate GARCH model to assess the persistence

of illiquidity shocks. The pricing of liquidity risk and its implications on expected returns are

empirically tested using the conditional LCAPM. We show that various sources of liquidity risk

that affect asset returns are time-varying. We find some support for our conditional LCAPM,

but our results are not robust to alternative specifications and estimation techniques. The total

annualized illiquidity premium found in the Norwegian stock market is 1.75%.