Abstract: This article establishes the theory on the effect of liquidity on asset values and provides estimations of the relation between expected returns and liquidity across different stocks. The Amihud–Mendelson model gives rise to two major empirical predictions that are discussed in this chapter's introduction: expected asset returns increase in the assets’ trading costs and the return–trading cost relation is concave. The first prediction results from the fact that investors demand a higher compensation for bearing higher trading costs. The second is due to the clientele effect: because less liquid assets are held in equilibrium by investors with longer holding periods, the additional compensation they require for an increase in trading costs is lower.
Publication Year: 2012
Publication Date: 2012-11-12
Language: en
Type: book-chapter
Indexed In: ['crossref']
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Cited By Count: 4
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