Pricing of time-varying liquidity risk in Finnish stock market: new evidence

Sheraz Ahmed*, Jani Hirvonen, Syed Mujahid Hussain

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


Using two recently developed illiquidity measures, we estimate a conditional version of liquidity-adjusted capital asset pricing model (LCAPM), which allows for a time-varying decomposition of the total illiquidity premium into a level component and three risk components. The total estimated annualized illiquidity premium for the Finnish equities during 1997–2015 is 1.13–1.90% depending on the illiquidity measure. Of the three systematic liquidity risk components, risk arising from hedging of wealth shocks is the most important followed by commonality in liquidity risk, whereas flight to liquidity risk is not significantly priced in the Finnish stock market. Our results show that the liquidity risk is time varying, therefore the models estimating the risk-return relationship should address the issue of conditionality.

Original languageEnglish
Pages (from-to)1147-1165
Number of pages19
JournalEuropean Journal of Finance
Issue number13
Publication statusPublished - Sept 2 2019
Externally publishedYes


  • illiquidity premium
  • Liquidity
  • stock market
  • thinly traded market

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)


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