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Explaining the Magnitude of Liquidity Premia: The Roles of Return Predictability, Wealth Shocks, and State‐Dependent Transaction Costs

Year: 2011

Type: article

Abstract: ABSTRACT Constantinides (1986) documents how the impact of transaction costs on per‐annum liquidity premia in the standard dynamic allocation problem with i.i.d. returns is an order of magnitude smaller than the cost rate itself. Recent papers form portfolios sorted on liquidity measures and find spreads in expected per‐annum return that are the same order of magnitude as the transaction cost spread. When we allow returns to be predictable and introduce wealth shocks calibrated to labor income, transaction costs are able to produce per‐annum liquidity premia that are the same order of magnitude as the transaction cost spread.

Source: The Journal of Finance

DOI: 10.1111/j.1540-6261.2011.01662.x

Authors: ANTHONY W. LYNCH, SINAN TAN

Institutions: National Bureau of Economic Research, New York University, Fordham University

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

OpenAlex ID: W2163139939

FWCI: 13.63

Cites: 48

Cited by: 100

Related to: 10