An Analysis of Temporal Relation between Monetary Conditions and Illiquidity Premium in Indonesia
42 Pages Posted: 9 Sep 2012
Date Written: August 20, 2012
The objective of this research is to find evidence of a systematic relation between monetary conditions and temporal variation in the price of liquidity in Indonesia. 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; hence, the measured return spread between illiquid and liquid stocks expands substantially. Overall, the evidence supports the claim that the price of asset liquidity is dependent on monetary conditions.
Keywords: Illiquidity, Liquidity, Asset pricing, Funding conditions, Monetary conditions
JEL Classification: G12, E52
Suggested Citation: Suggested Citation