Editing Liquidity risk (section)

==Pricing==
Risk-averse investors naturally require higher expected return as compensation for liquidity risk. The liquidity-adjusted CAPM pricing model therefore states that, the higher an asset's market-liquidity risk, the higher its required return.<ref>{{cite journal |doi=10.1016/j.jfineco.2004.06.007 |title=Asset pricing with liquidity risk |journal=Journal of Financial Economics |volume=77 |issue=2 |pages=375–410 |year=2005 |last1=Acharya |first1=V |last2=Pedersen |first2=L |url=http://archive.nyu.edu/handle/2451/26792 }}</ref>

A common method for estimating the upper bound for a security illiquidity discount is by using a Lookback option, where the premia is equal to the difference between the maximum value of a security during a restricted trading period and its value at the end of the period.<ref>{{cite journal |doi=10.1111/j.1540-6261.1995.tb05197.x |title=How Much Can Marketability Affect Security Values? |journal=The Journal of Finance |volume=50 |issue=5 |pages=1767–74 |year=1995 |last1=Longstaff |first1=Francis A. }}</ref> When the method is extended for corporate debt it is shown that liquidity risk increases with a bond credit risk.<ref>{{cite journal |doi=10.1016/j.jfs.2016.06.011 |title=How much can illiquidity affect corporate debt yield spread? |journal=Journal of Financial Stability |volume=25 |pages=58–69 |year=2016 |last1=Abudy |first1=Menachem Meni |last2=Raviv |first2=Alon }}</ref>