Liquidity Premia in Dynamic Bargaining Markets

37 Pages Posted: 3 Nov 2008

See all articles by Pierre-Olivier Weill

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005

Abstract

This paper develops a search-theoretic model of the cross-sectional distribution of asset returns, abstracting from risk premia and focusing exclusively on liquidity. I derive a float-adjusted return model (FARM),explainingthe pricing of liquidity with a simple linear formula: In equilibrium, the liquidity spread of an asset is proportional to the inverse of its free float, the portion of its market capitalization available for sale. This suggests that the free float is an appropriate measure of liquidity, consistent with the linear specifications commonly estimated in the empirical literature.The qualitative predictions of the model corroborate much of the empirical evidence.

Keywords: Liquidity premia, Search

Suggested Citation

Weill, Pierre-Olivier, Liquidity Premia in Dynamic Bargaining Markets (May 2005). NYU Working Paper No. FIN-05-018. Available at SSRN: https://ssrn.com/abstract=1294154

Pierre-Olivier Weill (Contact Author)

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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