Pricing Liquidity Risk with Heterogeneous Investment Horizons

69 Pages Posted: 25 Nov 2011 Last revised: 15 Oct 2012

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; Ortec Finance

Multiple version iconThere are 3 versions of this paper

Date Written: 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.

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

JEL Classification: G12

Suggested Citation

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

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

Ortec Finance ( email )

Orly Centre
Barajasweg 10
Amsterdam, 1043 CP
Netherlands

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