The Role of Illiquidity Risk Factor in Asset Pricing Models: Malaysian Evidence

Ruzita Abdul Rahim, Abu Hassan Shhari Mohd. Nor

Abstract


ABSTRACT
This paper examines the role of illiquidity risk factor in asset Pricing through two variants of liquidity-based three-factor models, referred as SiLiq and DiLiq, which are developed in the context of Fama-French model.
The sample comprises 230 to 480 firms which stocks are listed on Bursa Malaysia over the period of January 1987 to December 2004. To proxy for liquidity, this study tests six alternative measures based on trading volume variables, namely dollar volume (DVOL), share turnover (TURN), Illiquidity (ILLIQ), and the coefficient of variations of each of these variables (CVDVOL"
cVrURN" and cVILLIQ. The preliminary results indicate that the illiquidity risk factors (L M H) that are formed from TURN consistently outperform the other alternatives as they explain as high as 36 percent variations in stock returns. The results of multiple time series regressions lend strong support for the hypothesis that illiquidity risk are priced, particularly when is LMH incorporated in DiLiq.
ABSTRAK
Kertas ini meguji peranan risiko ketakcairan dalam penetapan harga aset melalui dua varian model tiga-faktor berasaskan kecairan, dirujuk sebagai SiLiq dan DiLiq, yang dibentuk dalam konteks model Fama-French. Sampel kajian merangkumi 230 hingga 480 syarikat yang sahamnya disenaraikan di Bursa Malaysia bagi tempoh Januari 1987 hingga Disember 2004. Untuk menentukan proksi bagi kecairan, kajian ini menguji enam ukuran alternatif berasaskan volum dagangan iaitu nilai valom dagangan (DVDL), pusingganti saham (TURN),ketakcairan (IUIQ), dan kaefisyen variasi bagi setiap satu ukuran tersebut ((CVDVOL" CVTURN" and cV,w,)' Hasil preliminari kajian menunjukkan faktor-faktor risiko ketakcairan (LMH) yang dibentuk daripada TURN secara konsisten mengatasi ukuran alternatif lain setelah didapati ia menjelaskan 36 peratus variasi dalam pUlangan saham. Hasil daripada regresi siri masa berganda memberikan sokongan kuat terhadap hipotesis bahawa risiko ketakcairan diganjari, khususnya apabila LMH diambilkira dalam DiLiq.


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