The Liquidity Premium Across Asset Classes
48 Pages Posted: 25 Aug 2020 Last revised: 28 Aug 2020
Date Written: August 23, 2020
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: Suggested Citation