Pricing Liquidity Risk on the Tokyo Stock Exchange: Empirical Analysis Using Multiple Liquidity Measures

Abstract

This study investigates the effectiveness of the liquidity-adjusted capital asset pricing model proposed by Acharya and Pedersen (2005). Using Japanese data, we compute multiple liquidity measures and a principal-component-based liquidity proxy to examine whether liquidity risk is priced on the Tokyo Stock Exchange. We find that the size and value effect should be considered together when studying the pricing of liquidity risk. Through our analysis, we suggest using the principal-component-based liquidity proxy or using multiple methods to estimate Japanese stock liquidity. To some extent, liquidity risk is priced on the Tokyo Stock Exchange.