• Business
  • Published 2010

Market Closure, Liquidity Premia, and Return Predictability

  title={Market Closure, Liquidity Premia, and Return Predictability},
  author={M. Dai and Peifan Li and Hong Liu},
In his seminal work, Constantinides (1986) finds that transaction cost has only a second order effect on liquidity premia. In this paper, we show that incorporating the well-established time-varying return dynamics across trading and nontrading periods can produce a first order effect that is much greater than that found by the existing literature and comparable to empirical evidence. Surprisingly, the higher liquidity premium is Not from higher trading frequency, but mainly from the… CONTINUE READING