Explaining the Magnitude of Liquidity Premia : The Roles of Return Predictability , Wealth Shocks , and State-Dependent Transaction Costs

@inproceedings{Lynch2002ExplainingTM,
  title={Explaining the Magnitude of Liquidity Premia : The Roles of Return Predictability , Wealth Shocks , and State-Dependent Transaction Costs},
  author={Anthony W. Lynch and Sinan Tan},
  year={2002}
}
The seminal work of Constantinides (1986) documents how, when the risky return is calibrated to the U.S. market return, the impact of transaction costs on per-annum liquidity premia is an order of magnitude smaller than the cost rate itself. A number of recent papers have formed portfolios sorted on liquidity measures and found a spread in expected per-annum return that is definitely not an order of magnitude smaller than the transaction cost spread: the expected per-annum return spread is… CONTINUE READING
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