Analyzing the Effect of Liquidity on Asset Pricing: using Epstein-Zin Model in the Iranian Capital Market

Document Type : Research Paper

Authors

1 PhD Student in Economics, Sistan and Baluchestan University

2 Associate Professor, Department of Economics, Sistan and Baluchestan University

Abstract

Liquidity is one of the most important aspects of development in financial markets and one
of the risk factors of financial assets. In this study, liquidity risk is also used as a factor to
modify the Epstein-Zin model, and its performance is evaluated against traditional
consumption-based asset pricing models. In order to adjust the Epstein-Zin model in this
study, the liquidity factors of Liu (2006), Turnover ratio, Gopalan and cGibbs have been
applied and the used data are for 48 stock companies from 2009 to 2017. The results
indicate that the adjusted model has a higher adjusted- than the traditional consumptionbased
capital asset pricing model and the traditional Epstein-Zin model, and indicates that
liquidity is a significant risk factor and adds a significant explanatory power to model.
Thus, overall, the results of this study show that liquidity risk is a pricing factor and its
incorporation into pricing models leads to improved model performance.

Keywords

References

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new economy and trad
Volume 15, Issue 1
June 2020
Pages 27-58

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History

  • Receive Date: 26 November 2019
  • Revise Date: 24 December 2019
  • Accept Date: 07 March 2020

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