The 'Ostrich Effect' and the Relationship between the Liquidity and the Yields of Financial Assets

27 Pages Posted: 3 Jun 2004  

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Orly Sade

Hebrew University of Jerusalem - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 2003

Abstract

This paper documents a puzzling observed anomaly in the relative value of a liquid and comparable illiquid asset. During a prolonged period of time Government T-bills provided a higher Yield to Maturity than an equally risky illiquid asset (bank deposits). This cannot be attributed to taxes, risk or transaction costs. We relate our finding to the literature on behavioral finance and, more specifically,to the Myopic Loss Aversion literature (MLA) that investigates the impact of the frequency of investment information flow on investment decisions. We suggest that the observed puzzle is due to the positive correlation between liquidity and the flow of market information. We use the term Ostrich Effect, to describe investor behavior, since ostriches are believed to treat apparently risky situations by pretending they do not exist. As predicted by the Ostrich Effect, we find that the difference between the return on the liquid asset relative to the illiquid asset is higher in periods of greater uncertainty.

Keywords: Liquidity, Behavioral Finance, Mental Accounting

JEL Classification: G14

Suggested Citation

Galai, Dan and Sade, Orly, The 'Ostrich Effect' and the Relationship between the Liquidity and the Yields of Financial Assets (July 2003). Available at SSRN: https://ssrn.com/abstract=431180 or http://dx.doi.org/10.2139/ssrn.431180

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 5883235 (Phone)
972 2 5881341 (Fax)

Orly Sade (Contact Author)

Hebrew University of Jerusalem - Department of Finance ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 588 3227 (Phone)

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