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

Posted: 2 Jun 2005

See all articles by Dan Galai

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Orly Sade

Hebrew University of Jerusalem - Department of Finance

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Abstract

This paper documents that government T-bills provided a higher Yield to Maturity than an equally risky illiquid asset (bank deposits) in Israel. This cannot be attributed to taxes, risk or transaction costs. We relate our finding to the Myopic Loss Aversion literature (MLA) and 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.

Suggested Citation

Galai, Dan and Sade, Orly, The 'Ostrich Effect' and the Relationship between the Liquidity and the Yields of Financial Assets. Journal of Business, Forthcoming. Available at SSRN: https://ssrn.com/abstract=734023

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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