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Please use this identifier to cite or link to this item: https://dspace.lboro.ac.uk/2134/24079

Title: The Epstein-Zin model with liquidity extension
Authors: Liu, Weimin
Luo, Di
Zhao, Huainan
Keywords: Liquidity risk
Consumption-based asset pricing
Model performance
Issue Date: 2016
Publisher: © The Eastern Finance Association. Published by Wiley
Citation: LIU, W., LUO, D. and ZHAO, H., 2016. The Epstein-Zin model with liquidity extension. Financial Review, 51(1), pp. 113-146.
Abstract: In this paper, we extend the Epstein and Zin (1989, 1991) 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 (1997) distance than the traditional consumption-based capital asset pricing model (CCAPM) 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.
Description: This paper is in closed access until 12th Jan 2018.
Version: Accepted for publication
DOI: 10.1111/fire.12098
URI: https://dspace.lboro.ac.uk/2134/24079
Publisher Link: http://dx.doi.org/10.1111/fire.12098
ISSN: 0732-8516
Appears in Collections:Closed Access (Business School)

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