The Pricing of Illiquidity as a Characteristic and as Risk

20 Pages Posted: 7 Nov 2015

See all articles by Yakov Amihud

Yakov Amihud

New York University - Stern School of Business

Haim Mendelson

Stanford University - Stanford Graduate School of Business

Date Written: November 6, 2015

Abstract

This paper reviews research on the effects of different measures of liquidity on asset prices. The foundation is the pricing of liquidity as an asset characteristic that began with the theoretical model and empirical evidence of Amihud and Mendelson (1986). The positive relation between expected returns on financial assets and the illiquidity of these assets has since been reconfirmed both in the U.S. and worldwide. The positive relation between illiquidity and expected return gives rise to research on the effect of liquidity-related systematic risk. Two types of such risk are shown to be priced: exposure to shocks in market liquidity and exposure to the market illiquidity return premium. The pricing of these risks is stronger in times of greater funding illiquidity and economic stress.

Keywords: liquidity; asset pricing; system risk; Amihud measure

Suggested Citation

Amihud, Yakov and Mendelson, Haim, The Pricing of Illiquidity as a Characteristic and as Risk (November 6, 2015). Multinational Finance Journal, Vol. 19, No. 3, p. 149-168, 2015, Available at SSRN: https://ssrn.com/abstract=2687047

Yakov Amihud (Contact Author)

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Haim Mendelson

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