Using data from OptionMetrics for the period of 1996 to 2013, we establish the existence of liquidity risk premium in option returns via both sorting analyses and Fama-MacBeth regressions. In leverage-adjusted, hedged returns, the alpha due to liquidity risk ranges from 11.2 basis points to 19.7...

Market liquidity is informative of future corporate defaults but in a nuanced way. A firm's probability of default increases with market illiquidity only when the firm's funding liquidity is tight and/or solvency position is weak. Such relationship persists after controlling for a variety of...

A method for computing forward-looking market risk premium is developed in this paper. We first derive a theoretical expression that links forward-looking risk premium to investors' risk aversion and cumulative return's forward-looking volatility, skewness and kurtosis. In addition, investor's...