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Liquidity Adjusted Capital Asset Pricing Model Using Amortized Liquidation Cost as Liquidity Measure

Liquidity Adjusted Capital Asset Pricing Model Using Amortized Liquidation Cost as Liquidity Measure
Erna Garnia, Rachmat Sudarsono, Dian Masyita, Ina Primiana
Universitas Padjadjaran, The 18th of Malaysian Finance Association Annual Conference, Malaysia 2016, https://www.researchgate.net/publication/311928359_Liquidity_adjusted_capital_asset_pricing_model_LCAPM_A_critical_review, January 2016
Bahasa Inggris
Universitas Padjadjaran, The 18th of Malaysian Finance Association Annual Conference, Malaysia 2016, https://www.researchgate.net/publication/311928359_Liquidity_adjusted_capital_asset_pricing_model_LCAPM_A_critical_review, January 2016
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This paper shows that the proper liquidity measure in liquidity adjusted capital asset pricing model (LCAPM) is amortized liquidation cost. The amortized liquidation cost is defined as liquidation cost times the turnover. In this paper, bid-ask spread, Amihud factor, and price change are used and compared as liquidation proxies. It is shown here that by using amortized liquidation costs, the liquidity is significantly priced and robust compared to nonamortized ones. Data from Indonesia Stock Exchanges is used to verify the proposed concept. Empirical results show that the amortized price change results in more significant effect compared to amortized bid-ask spread and amortized Amihud factor.

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