Pricing of liquidity risks: Evidence from multiple liquidity measures

•There exists systematic common component across eight different illiquidity measures.•Tests of the liquidity-adjusted CAPM are sensitive to the measure.•Tests based on principal component show that multiple liquidity risks are priced.•It is systematic common components that are priced.

We investigate the pricing implication of liquidity risks in the liquidity-adjusted capital asset pricing model of Acharya and Pedersen (2005), using multiple liquidity measures and their principal component. While we find that the empirical results are sensitive to the liquidity measure used in the test, we find strong evidence of pricing of liquidity risks when we estimate liquidity risks based on the first principal component across eight measures of liquidity, both in the cross-sectional and factor-model regressions. Our finding implies that the systematic component measured by each liquidity proxy is correlated across measures and the shocks to the systematic and common component of liquidity are an undiversifiable source of risk.