Abstract

http://ssrn.com/abstract=1964709
 
 

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Pricing Liquidity Risk with Heterogeneous Investment Horizons


Alessandro Beber


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

Joost Driessen


Tilburg University - Department of Finance; CentER Tilburg University

Patrick Tuijp


University of Amsterdam - Finance Group; Tilburg University - Department of Finance

October 15, 2012


Abstract:     
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.

Number of Pages in PDF File: 69

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

JEL Classification: G12

working papers series


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Date posted: November 25, 2011 ; Last revised: October 15, 2012

Suggested Citation

Beber, Alessandro and Driessen, Joost and Tuijp, Patrick, Pricing Liquidity Risk with Heterogeneous Investment Horizons (October 15, 2012). Available at SSRN: http://ssrn.com/abstract=1964709 or http://dx.doi.org/10.2139/ssrn.1964709

Contact Information

Alessandro Beber
Cass Business School ( email )
London, EC2Y 8HB
Great Britain
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Joost Driessen
Tilburg University - Department of Finance ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
CentER Tilburg University ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Patrick Tuijp (Contact Author)
University of Amsterdam - Finance Group ( email )
Roetersstraat 18
Amsterdam, 1018WB
Netherlands
Tilburg University - Department of Finance ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
HOME PAGE: http://www.tilburguniversity.edu/webwijs/show/?uid=p.f.a.tuijp
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