This study investigates whether market-wide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of...

To study inflation expectations and associated risk premia in emerging bond markets, this paper provides estimates for Mexico based on an arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for their liquidity risk. In addition to documenting the existence...

Is the effect of liquidity risk on asset prices sensitive to our choice of liquidity proxy? In addressing this fundamental question, we achieve two main results. First, when we estimate factor models on a broad range of liquidity measures we uncover a profound distinction between trade and order...

I study the behaviour of the CDS-bond basis - the difference between the CDS and the bond spread - for a sample of investment-graded US firms. I document that, since the onset of the 2007/08 financial crisis it has become persistently negative, and I investigate the role played by the cost of...

Looking at the valuation of a swap when funding costs and counterparty risk are neglected (i.e., when there is a unique risk free discounting curve), it is natural to ask "What is the discounting curve of a swap in the presence of funding costs, counterparty risk and/or collateralization". In...

This paper studies the valuation of corporate debt contracts in an intertemporal setting under uncertainty taking into account the possibility that the bondholder will be unable to sell his asset. The model considers a coupon paying debt contract with default risk in a binomial setting. Randomly...

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...

In this article, we study the effect of liquidity risk on the performance of various hedge fund portfolio strategies. The portfolio strategies in each hedge fund style are formed by incorporating predictability in: (i) managerial skills, (ii) fund risk loadings, and (iii) benchmark returns. As...

Despite the single currency, yields on government bonds in the Euro Area deviate from German bond yields. These bond spreads are usually attributed to differing default and liquidity risks. Recent research points out that time-varying global factors, approximated by risk measures or short term...

Is the effect of liquidity risk on asset prices sensitive to our choice of liquidity proxy? In addressing this fundamental question, we achieve two main results. First, when we estimate factor models on a broad range of liquidity measures we uncover a profound distinction between trade and order...