Inter-Temporal Variation in the Illiquidity Premium

59 Pages Posted: 4 Feb 2010 Last revised: 16 Sep 2014

See all articles by Gerald R. Jensen

Gerald R. Jensen

Northern Illinois University

Theodore C. Moorman

affiliation not provided to SSRN

Date Written: January 27, 2010

Abstract

We find evidence of a systematic link between monetary conditions and inter-temporal variation in the price of liquidity. Specifically, following an expansive monetary policy shift, funding conditions improve and market-wide liquidity increases, which is especially beneficial for illiquid securities. The improved liquidity and funding conditions reduce the returns required for holding illiquid securities. Consequently, illiquid stocks experience relatively large price increases when monetary conditions become expansive, and thus, the measured return spread between illiquid and liquid stocks expands substantially. Overall, our evidence supports the claim that the price of asset liquidity is dependent on monetary conditions.

Keywords: liquidity, funding, monetary, time varying risk, time series, conditional asset pricing models

JEL Classification: G12, E44

Suggested Citation

Jensen, Gerald and Moorman, Theodore C., Inter-Temporal Variation in the Illiquidity Premium (January 27, 2010). Journal of Financial Economics (JFE), Volume 98, Issue 2, November 2010, Pages 338-358., Available at SSRN: https://ssrn.com/abstract=1105925

Gerald Jensen

Northern Illinois University ( email )

Barsema Hall
Finance Department
DeKalb, IL 60115
United States
815-753-6399 (Phone)

Theodore C. Moorman (Contact Author)

affiliation not provided to SSRN

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