Volume 19, Number 3 / September , Pages 149-221
The Pricing of Illiquidity as a Characteristic and as Risk
Multinational Finance Journal, 2015, vol. 19, no. 3, pp. 149-168
Yakov Amihud , NYU-Stern, USA    Corresponding Author
Haim Mendelson , Stanford University, USA

This paper reviews research on the effects of different measures of liquidity on asset prices. The foundation is the pricing of liquidity as an asset characteristic that began with the theoretical model and empirical evidence of Amihud and Mendelson (1986). The positive relation between expected returns on financial assets and the illiquidity of these assets has since been reconfirmed both in the U.S. and worldwide. The positive relation between illiquidity and expected return gives rise to research on the effect of liquidity-related systematic risk. Two types of such risk are shown to be priced: exposure to shocks in market liquidity and exposure to the market illiquidity return premium. The pricing of these risks is stronger in times of greater funding illiquidity and economic stress.

Keywords : liquidity; asset pricing; system risk; Amihud measure
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