Liquidity and Asset Prices (Foundations and Trends in by Yakov Amihud, Visit Amazon's Haim Mendelson Page, search

By Yakov Amihud, Visit Amazon's Haim Mendelson Page, search results, Learn about Author Central, Haim Mendelson, , Lasse Heje Pederson

Liquidity and Asset costs studies the literature that reviews the connection among liquidity and asset costs. The authors assessment the theoretical literature that predicts how liquidity impacts a security's required go back and talk about the empirical connection among the 2. Liquidity and Asset costs surveys the idea of liquidity-based asset pricing through the empirical proof. the idea part proceeds from uncomplicated types with exogenous retaining classes to people who include extra components of chance and endogenous maintaining sessions. The empirical part stories the proof at the liquidity top class for shares, bonds, and different monetary resources.

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When the market declines, investors are poor and the ability to sell easily is especially valuable. Hence, an 5 See evidence in Hasbrouck and Seppi (2001), Huberman and Halka (2001), Chordia et al. (2002). 6 See evidence in Amihud (2002). 7 See evidence in Acharya and Pedersen (2005) and Chordia et al. (2005). 22 Theory investor is willing to accept a discounted return on stocks with low illiquidity costs in states of poor market return. Empirically, liquidity is persistent over time,8 meaning that if a market is illiquid today, then it is more likely to not fully recover next month.

Also, the partial equilibrium approach of Constantinides (1986) has been extended by Jang et al. 13 These motivations for trading in excess of Constantinides (1986) portfolio rebalancing motive increase the resulting trading frequency and the impact of transaction costs on price. These authors show through numerical calibration that the liquidity premium can be large for certain parameters that they find realistic. Vayanos and Vila (1999) study an OLG model with a risky asset with proportional trading costs and a liquid riskless asset in fixed supply, thus endogenizing the riskless interest rate.

This can happen because, while trading costs make investors buy fewer shares, they induce them to hold the shares for longer periods, which can raise the total asset demand. Some of the observed evidence in the market is consistent with these models’ predictions. S. stock markets, partly due 1 to reducing the minimum tick from $ 81 to $ 16 and then to a penny. , by Constantinides’s model, where the width of the no-trade region increases in trading costs. , by Vayanos is around 3%, which is quite low relative to observed turnover.

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