Liquidity and Asset Prices

  title={Liquidity and Asset Prices},
  author={Yakov Amihud and Haim Mendelson and Lasse Heje Pedersen},
  journal={Capital Markets: Asset Pricing \& Valuation eJournal},
We review the theories on how liquidity affects the required returns of capital assets and the empirical studies that test these theories. The theory predicts that both the level of liquidity and liquidity risk are priced, and empirical studies find the effects of liquidity on asset prices to be statistically significant and economically important, controlling for traditional risk measures and asset characteristics. Liquidity-based asset pricing empirically helps explain (1) the cross-section… 
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