Liquidity Premium and Consumption
National University of Singapore (NUS) - Department of Accounting
Department of Finance, NUS Business School, National University of Singapore
January 9, 2011
Fifth Singapore International Conference on Finance 2011
This paper studies the relationship between the liquidity premium and risk exposure to the shocks that influence consumption in the long run. We find illiquid stocks do not provide good hedge against the consumption fluctuation and have higher risk exposure to the consumption shock. The observed liquidity premium can be explained by the difference between such long-run risk exposure of liquid and illiquid stocks. The model implied liquidity premium increases with the risk aversion of investors and is insensitive to the specification of intertemporal substitution.
Number of Pages in PDF File: 36
Keywords: Liquidity Premium, Long-Run Risk, Consumption-Based Asset Pricing Model
JEL Classification: G12,working papers series
Date posted: January 9, 2011
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