The Factors Model Of Liu ( 2006 ) Using The Current Crsp Accumulation Of The Trading Volume Data Daily

854 Words Mar 17th, 2015 4 Pages
The main focus of the paper is on the two factor model of Liu (2006) using the current CRSP accumulation of the trading volume data daily during the time period of 1926 to 1962. The literature based on liquidity has been divided into three segments in the past studies conducted which are: Firstly, the search for liquidity proxies which has been conducted by Amihud and Mendelson (1986) where they suggest the bid ask spread measure and the research done by Datar et al. (1998) use turnover as an alternative; Secondly, the research is examined to show that liquidity is systematic which has been done by Chordia et al. (2000) and Huberman and Halka (2001); Finally the third range of studies talk about of incorporating the liquidity risk into an asset pricing model which has been discussed in the Pastor and Stambaugh (2003) paper about the sensitivity of the stock returns in regard to the fluctuations in aggregate liquidity. But in more recent paper by Liu (2006) there has been a discussion on a new liquidity measure which has been characterised as the standardised turnover adjusted number on zero daily trading volumes for a previous period.
As the Capital Asset Pricing Model does not take into account liquidity risk as well as distress risk proxied by Fama and French Size, therefore Liu (2006) has developed a two factor model for pricing where the liquidity factor is augmented using CAPM and the model explains the expected return of a stock to its covariance of return in regard…

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