How is Liquidity Priced in Global Markets?

Abstract

Abstract We develop a new global asset pricing model to study how illiquidity interacts with market segmentation and investability constraints in 42 markets. Noninvestable stocks that can only be held by foreign investors earn higher expected returns compared to freely investable stocks due to limited risk sharing and higher illiquidity. In addition to the world market premium, on average, developed and emerging market noninvestables earn an annual unspanned local market risk premium of $1.17\%$ and $9.04\%$, and a liquidity level premium of $1.06\%$ and $2.39\%$, respectively. These results obtained in a conditional setup are robust to the choice of liquidity measure.

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