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
There are 3 versions of this paper
Pricing Liquidity Risk with Heterogeneous Investment Horizons
Pricing Liquidity Risk with Heterogeneous Investment Horizons
Pricing Liquidity Risk with Heterogeneous Investment Horizons
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: Suggested Citation
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