A Liquidity-adjusted-cvar Based Asset Pricing Model

Classical theory of portfolio and asset pricing is mainly based on the measurement of risk with the method of variance, which differs from the real feeling of investor in practice. In order to make up for the deficit of variance in risk measurement, some scholars invent the CVaR method instead of variance method. Besides the return volatility, liquidity is another important risk factor found to be impactive in asset pricng. Therefore, integrate liquidity into CVaR will probably make the new market equilibrium differ from the equlibrium in classical theory, and the analysis of asset pricing under the new equilibrium will be of great significance.I firstly analyze the research work referring to risk measurement, liquidity and asset pricing. Then the CAPM, Fama's three factor model, LA-CAPM and asset pricing model based on VaR are compared accordingly. Meanwhile, I choose a relevant liquidity measurement which is the essential factor of the liquidity adjustment of CVaR. Furhterly I set up a asset pricing model based on the former liquidity adjusted CVaR, which make up for the deficit of classical asset pricing model. Finally, according to the empirical study, the asset pricing model based on liquidity adjusted CVaR is proved to be effective. Also, the pricing model based on liquidity adjusted CVaR is relative efficient than the other pricing models. The risk factors in the pricing model based on liquidity adjusted CVaR have better explaining power than classical risk facotors, which means that the research work in this paper is meaningful.