Is Depressed Wealth Effect of Liquidity a Priced Risk Factor? Evidence From Developed and Emerging Markets

The current study attempts to investigate that the depressed wealth effect of liquidity risk is priced in developed and emerging markets or not. Multiple liquidity measures including Amivest liquidity, market efficiency coefficient, Roll estimator and value turnover are used in the study for analyzing various aspects of liquidity. Innovations in liquidity measures are formulated to avoid the persistence of liquidity. Regression in a panel data set has been employed on the indices of Pakistan, India, Thailand and Japan over the period 2005-2017. The results of the study suggest that the illiquidity depressed wealth beta contributes to explaining the systematic risk on stock returns. Moreover the return sensitivity to the market liquidity in the emerging market is positive and significant in contrast to depressed wealth theory. Besides the pricing of depresse wealth risk is sensitive to liquidity measures used in the study. So investors should give practical value to depressed wealth beta for the assessment of securities while designing portfolios