- Pricing Liquidity Risk with Heterogeneous Investment Horizons
- Number of pages
- Cass Business School
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
We develop a new asset pricing model with stochastic transaction costs and investors with heterogenous horizons. Short-term investors hold only liquid assets in equilibrium. This generates
segmentation effects in the pricing of liquid versus illiquid assets. Specifically, the liquidity (risk) premia of illiquid assets are determined by the heterogeneity in investor horizons and by the correlation between liquid and illiquid assets. We estimate our model for the cross-section of U.S. stocks and find that it fits average returns substantially better than a standard liquidity CAPM. Allowing for heterogenous horizons also leads to much larger estimates for the liquidity premia.
- This Draft: October 2012
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.