The Epstein–Zin Model with liquidity extension
The Epstein–Zin Model with liquidity extension
In this paper, we extend the Epstein–Zin model with liquidity risk and assess the extended model's performance against the traditional consumption pricing models. We show that liquidity is a significant risk factor, and it adds considerable explanatory power to the model. The liquidity-extended model produces both a higher cross-sectional R2 and a smaller Hansen and Jagannathan distance than the traditional consumption-based capital-asset pricing model and the original Epstein–Zin model. Overall, we show that liquidity is both a priced factor and a key contributor to the extended Epstein–Zin model's goodness-of-fit.
113-146
Liu, Weimin
60544d50-85d9-433b-848a-4c0cbed8868b
Luo, Di
cc1b0fa7-f630-45dc-ab05-495f9023148f
Zhao, Huainan
971c095a-1fa8-446f-ae16-34db38645f20
February 2016
Liu, Weimin
60544d50-85d9-433b-848a-4c0cbed8868b
Luo, Di
cc1b0fa7-f630-45dc-ab05-495f9023148f
Zhao, Huainan
971c095a-1fa8-446f-ae16-34db38645f20
Liu, Weimin, Luo, Di and Zhao, Huainan
(2016)
The Epstein–Zin Model with liquidity extension.
Financial Review, 51 (1), .
(doi:10.1111/fire.12098).
Abstract
In this paper, we extend the Epstein–Zin model with liquidity risk and assess the extended model's performance against the traditional consumption pricing models. We show that liquidity is a significant risk factor, and it adds considerable explanatory power to the model. The liquidity-extended model produces both a higher cross-sectional R2 and a smaller Hansen and Jagannathan distance than the traditional consumption-based capital-asset pricing model and the original Epstein–Zin model. Overall, we show that liquidity is both a priced factor and a key contributor to the extended Epstein–Zin model's goodness-of-fit.
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e-pub ahead of print date: 12 January 2016
Published date: February 2016
Organisations:
Banking & Finance
Identifiers
Local EPrints ID: 410569
URI: http://eprints.soton.ac.uk/id/eprint/410569
ISSN: 0732-8516
PURE UUID: 80b09ebd-cc8d-436a-86b5-7472e3092ef3
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Date deposited: 09 Jun 2017 09:08
Last modified: 16 Mar 2024 04:28
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Author:
Weimin Liu
Author:
Di Luo
Author:
Huainan Zhao
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