The Liquidity Premium Across Asset Classes

48 Pages Posted: 25 Aug 2020 Last revised: 28 Aug 2020

See all articles by Kristy A.E. Jansen

Kristy A.E. Jansen

Tilburg University; De Nederlandsche Bank - Research Department

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Date Written: August 23, 2020

Abstract

Empirical studies show mixed evidence of first-order liquidity premiums for several asset classes. In this study, we solve a flexible model that captures both transactions costs and the infrequencies of trading opportunities for illiquid assets to achieve better guidance as to which asset classes have first-order liquidity premiums. For the asset classes of private equity, direct real estate, corporate bonds, and stocks, we model heterogeneous agents to derive the liquidity premiums. Our model shows an average annual liquidity premium of 5-15 basis points for private equity, 15-35 basis points for direct real estate, 30-50 basis points for corporate bonds, and 20-45 basis points for stocks. The source of illiquidity and the heterogeneity in the share of investors that demand first-order liquidity premiums across asset classes drive these findings.

Keywords: illiquid assets, infrequent trades, liquidity premium, portfolio choice, transaction costs

JEL Classification: G11, G12

Suggested Citation

Jansen, Kristy A.E. and Werker, Bas J.M., The Liquidity Premium Across Asset Classes (August 23, 2020). Available at SSRN: https://ssrn.com/abstract=3679461 or http://dx.doi.org/10.2139/ssrn.3679461

Kristy A.E. Jansen (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Bas J.M. Werker

Tilburg University - Center for Economic Research (CentER) ( email )

Econometrics and Finance Group
5000 LE Tilburg
Netherlands

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