Critical Finance Review > Vol 8 > Issue 1-2

Do the LCAPM Predictions Hold? Replication and Extension Evidence

Craig W. Holden, Indiana University, Bloomington, USA, , Jayoung Nam, Southern Methodist University, USA,
Suggested Citation
Craig W. Holden and Jayoung Nam (2019), "Do the LCAPM Predictions Hold? Replication and Extension Evidence", Critical Finance Review: Vol. 8: No. 1-2, pp 29-71.

Publication Date: 17 Dec 2019
© 2019 Craig W. Holden and Jayoung Nam
JEL codes: G0G1G12
Liquidity riskLiquidity-adjusted CAPMLiquidity measures


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In this article:
1. Introduction 
2. Hypotheses 
3. Replication Tests of the LCAPM 
4. Extension Tests of the LCAPM 
5. Conclusion 
6. Appendix 


First, we replicate the Liquidity-adjusted Capital Asset Pricing Model (LCAPM) tests of Acharya and Pedersen (2005) using their original methodology and covering both their original time period and a more recent period. We successfully qualitatively replicate the descriptive and the first-stage tables and figures, but are not successful in replicating the second-stage tables that perform cross-sectional tests. In the large majority of cases, our replication evidence fails to support that the main LCAPM predictions all hold simultaneously. Next, we extend tests of the LCAPM following the Lee (2011) methodology and expanding to: (1) three different time periods spanning 90 years, (2) add NASDAQ stocks, (3) use four alternative liquidity measures, and (4) add risk or characteristic factors. Our extension evidence always fails to support that the main predictions of the Lee two-beta LCAPM and of the four-beta LCAPM hold at the same time. Overall, we fail to support that liquidity risk matters in the specific functional form predicted by the LCAPM. However, we are silent on the more general question of whether liquidity risk matters in some different functional form. We make publicly available our SAS code.