Pricing Liquidity Risk with Heterogeneous Investment Horizons

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

101 Pages Posted: 25 Nov 2011 Last revised: 31 Mar 2020

See all articles by Alessandro Beber

Alessandro Beber

Cass Business School; Centre for Economic Policy Research (CEPR)

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management; Tilburg University - Center for Economic Research (CentER)

Anthony Neuberger

City University London - Faculty of Finance

Patrick Tuijp

University of Amsterdam - Finance Group; Ortec Finance

Multiple version iconThere are 3 versions of this paper

Date Written: January 22, 2018

Abstract

We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small.

Keywords: liquidity premium, liquidity risk, investment horizon, holding period

JEL Classification: G12

Suggested Citation

Beber, Alessandro and Driessen, Joost and Neuberger, Anthony and Tuijp, Patrick and Tuijp, Patrick, Pricing Liquidity Risk with Heterogeneous Investment Horizons (January 22, 2018). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1964709 or http://dx.doi.org/10.2139/ssrn.1964709

Alessandro Beber

Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Joost Driessen (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Anthony Neuberger

City University London - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

Patrick Tuijp

Ortec Finance ( email )

Orly Centre
Barajasweg 10
Amsterdam, 1043 CP
Netherlands

University of Amsterdam - Finance Group ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

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