Analyzing the Nonlinear Pricing of Liquidity Risk according to the Market State

Abstract This study examines the asymmetric impact of systemic liquidity on asset prices across market states. We use time-series conditional quantile regressions to estimate an otherwise traditional liquidity-augmented three-factor model for prices. find exposure equity returns risk be dependent state. Contrary general assumptions, our results show that is not always a relevant factor explaining stock and it only becomes when state particularly good or bad. Search-for-yield flight-to-liquidity considerations help explain findings.