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Equity Risk Premium Estimation Models: A study of the effects of trading liquidity on traditional asset pricing models
Norwegian University of Science and Technology, Faculty of Social Sciences and Technology Management, Department of Industrial Economics and Technology Management.
2011 (English)MasteroppgaveStudent thesis
Abstract [en]

I ask whether added liquidity factors improve the ability of the Sharp-Lintner CAPM and the Fama French three-factor model to explain asset returns, ex-post, in the Norwegian stock market. Through cross-sectional and time-series regression tests, on both the original and the liquidity-augmented versions of the equity risk premium models, I search for a reversed liquidity premium in the period 2006-2011. I find that the liquidity factors, represented by the bid-ask spread and turnover, marginally improve the empirical ability of the models to explain asset prices and conclude that there is empirical support for a multidimensional liquidity premium. The implications of my results contradict flight-to-liquidity theory and suggest that different dimensions of liquidity are rewarded a premium in different stages of the business-cycle - offering liquidity based rationale for the size and value-effect.

Place, publisher, year, edition, pages
Institutt for industriell økonomi og teknologiledelse , 2011. , 80 p.
Keyword [no]
ntnudaim:6331, MIENTRE NTNUs Entreprenørskole,
URN: urn:nbn:no:ntnu:diva-15837Local ID: ntnudaim:6331OAI: diva2:507350
Available from: 2012-03-04 Created: 2012-03-04

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