Workshop Series: Talis Putnins
This paper contributes to the debate about the extent to which liquidity risk affects asset prices. Motivated by evidence on downward liquidity spirals, flights to liquidity and investor perceptions of risk, we develop and test a liquidity-adjusted capital asset pricing model in which the key innovation is separating liquidity risk into asymmetric upside and downside risks. Our model bridges the literature on asset pricing implications of liquidity and the literature on nonlinear pricing kernels. We find strong empirical support for the model in cross-sectional tests. Stocks with high downside liquidity risk command an economically meaningful expected return premium, which is distinct from that of upside liquidity risk. Expected illiquidity is also associated with a return premium. The premiums are robust to permutations of the model and controlling for a wide range of other known factors including the market, size, and value factors, momentum, short-term reversal, and co-skewness.
Talis Putnins is the Chancellor’s Postdoctoral Research Fellow in Finance at the UTS Business School in Sydney, and Research Associate at the Stockholm School of Economics in Riga and the Baltic International Centre for Economic Policy Studies. His main research interests include financial market microstructure, liquidity, price discovery, and market manipulation. His research has been published in peer-reviewed journals such as Journal of Financial and Quantitative Analysis, Journal of Financial Intermediation, Experimental Economics, and the Review of Finance. Tālis has a PhD from the University of Sydney and degrees in finance and engineering from the University of Adelaide, where he was awarded the University Medal.