This Paper studies equilibrium asset pricing with liquidity risk (the risk arising from unpredictable changes in … liquidity over time). It is shown that the required return on a security depends on its expected illiquidity, the covariances of … its own return, illiquidity with market return, and market illiquidity. This gives rise to a liquidity-adjusted capital …

liquidity demanders rather than providers. The effects on security markets were large and persistent: Prices dropped relative to …

This Paper solves explicitly a simple equilibrium asset pricing model with liquidity risk – the risk arising from … unpredictable changes in liquidity over time. In our liquidity-adjusted capital asset pricing model, a security’s required return … depends on its expected liquidity as well as on the covariances of its own return and liquidity with market return and market …

overshooting and a reduced liquidation value for the distressed trader. Hence, the market is illiquid when liquidity is most needed …