Estimating the effect of liquidity risk on risk premia: An analysis of the Philippine equity market for the years, 1989-2012

• Main Authors: Go, Tiffanie O., Lee, Patrick Jan N., Lu, Arbee B., Xu, Shayne Jacqueline G.
• Format: text
• Language: English
• Published: Animo Repository 2014
• Subjects: Stock exchanges > Philippines; Stocks > Prices; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/9022
• Institution: De La Salle University

The liquidity preference theory of market prices states that a rational investor would be willing to pay more for a more liquidity asset and would require a significant premium before opting to buy one that is less liquid. Previous studies on the effects of undiversifiable risk on the risk premium conducted in the Philippines that made use of the basic capital asset pricing model yielded inconclusive results hence, this study made use of a modified version of the model-- the liquidity-adjusted capital asset pricing model-- in order to single out the effect of liquidity on the risk premium. Data on the different stocks listed in the Philippine equity market during years 1989-2012 was gathered from Technistock Philippines, Incorporated and the Philippine Institute for the Development Studies. The study determined that liquidity risk is insignificant in determining risk premium in the Philippine market due to market inefficiencies, irrationality of investor behavior, and a need for more observations.