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Pricing Liquidity Risk with Heterogeneous Investment Horizons

Beber, A., Driessen, J., Neuberger, A. ORCID: 0000-0002-5344-1083 and Tuijp, P. (2019). Pricing Liquidity Risk with Heterogeneous Investment Horizons. Journal of Financial and Quantitative Analysis,

Abstract

We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small.

Publication Type: Article
Additional Information: This article has been accepted for publication in Journal of Financial and Quantitative Analysis, in a revised form (https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis#). This version is free to view and download for private research and study only. Not for re-distribution or re-use. © copyright holder.
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: https://openaccess.city.ac.uk/id/eprint/23388
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