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Liquidity and Asset Prices
Yakov Amihud,Haim Mendelson,Lasse Heje Pedersen +2 more
- 01 Dec 2005
TL;DR: In this paper, the authors review the theories on how liquidity affects the required returns of capital assets and the empirical studies that test these theories and find the effects of liquidity on asset prices to be statistically significant and economically important, controlling for traditional risk measures and asset characteristics.
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Abstract: We review the theories on how liquidity affects the required returns of capital assets and the empirical studies that test these theories. The theory predicts that both the level of liquidity and liquidity risk are priced, and empirical studies find the effects of liquidity on asset prices to be statistically significant and economically important, controlling for traditional risk measures and asset characteristics. Liquidity-based asset pricing empirically helps explain (1) the cross-section of stock returns, (2) how a reduction in stock liquidity result in a reduction in stock prices and an increase in expected stock returns, (3) the yield differential between on- and off-the-run Treasuries, (4) the yield spreads on corporate bonds, (5) the returns on hedge funds, (6) the valuation of closed-end funds, and (7) the low price of certain hard-to-trade securities relative to more liquid counterparts with identical cash flows, such as restricted stocks or illiquid derivatives. Liquidity can thus play a role in resolving a number of asset pricing puzzles such as the small-firm effect, the equity premium puzzle, and the risk-free rate puzzle.
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Citations
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References
Non‐Fundamental Speculation
TL;DR: In this paper, the authors study an intertemporal asset market where insiders coexist with non-fundamental speculators and show that the entry of rational speculators can lead to reductions in market liquidity and in the information content of prices, even in an efficient market.
114
What Level of Fixed Costs Can Reconcile Consumption and Stock Returns
TL;DR: In this paper, a lower bound on the level of fixed transaction costs that is required for observations on consumption choices to be consistent with data on asset returns and a given set of preferences is proposed.
111
The Impact of Rule 144A Debt Offerings upon Bond Yields and Underwriter Fees
Miles Livingston,Lei Zhou +1 more
TL;DR: In this article, the authors examined industrial and utility bonds issued under Rule 144A and found that they have higher yields than publicly issued bonds after adjusting for risk, due to lower liquidity, information uncertainty, and weaker legal protection for investors.
106
A Search-Based Theory of the On-the-Run Phenomenon
TL;DR: In this paper, the authors propose a model in which assets with identical cash flows can trade at different prices, and show that short-sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed.