Hostname: page-component-76d6cb85b7-lrvh5 Total loading time: 0 Render date: 2026-07-16T17:40:43.753Z Has data issue: false hasContentIssue false
  • English
  • Français

Pricing Liquidity Risk with Heterogeneous Investment Horizons

Published online by Cambridge University Press:  03 April 2020

Alessandro Beber ,
Joost Driessen Open the ORCID record for Joost Driessen [Opens in a new window] ,
Anthony Neuberger  and
Patrick Tuijp Open the ORCID record for Patrick Tuijp [Opens in a new window]
Alessandro Beber
Affiliation:
Beber, Alessandro.Beber@gmail.com, BlackRock and Center for Economic and Policy Research (CEPR)
Joost Driessen*
Affiliation:
Driessen, j.j.a.g.driessen@uvt.nl, Tilburg University
Anthony Neuberger
Affiliation:
Neuberger, Anthony.Neuberger.1@city.ac.uk, Cass Business School, City, University of London
Patrick Tuijp
Affiliation:
Tuijp, Patrick.Tuijp@ortec-finance.com, Ortec Finance and University of Amsterdam
*
Driessen (corresponding author), j.j.a.g.driessen@uvt.nl
Get access Rights & Permissions [Opens in a new window]

Abstract

We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 2 , March 2021 , pp. 373 - 408
Copyright
© Michael G. Foster School of Business, University of Washington 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

We thank Frank de Jong, Bart Diris, Darrell Duffie, Pete Kyle, Marco Pagano, Richard Payne, Ken Singleton, and Dimitri Vayanos; seminar participants at University of Essex (2011), University of Maryland (2011), University of North Carolina (2011), Tilburg University (2012), the 2011 Center for Studies in Economics and Finance and Innocenzo Gasparini Institute for Economic Research (CSEF-IGIER) Symposium on Economics and Institutions, the 2013 European Finance Association (EFA) Conference, the Duisenberg School of Finance (2012), the Financial Risks International Forum (2013), the 2011 Erasmus Liquidity Conference, the 2012 Tinbergen Institute Conference (joint with Society for Financial Econometrics (SoFiE)), and the 2012 Western Finance Association (WFA) conference; and Jack Bao (the referee and also the WFA 2012 discussant) and Jennifer Conrad (the editor) for very useful comments.

References

Acharya, V. V.; Amihud, Y.; and Bharath, S. T.. “Liquidity Risk of Corporate Bond Returns: Conditional Approach.” Journal of Financial Economics, 110 (2013), 358–386.Google Scholar
Acharya, V. V., and Pedersen, L. H.. “Asset Pricing with Liquidity Risk.” Journal of Financial Economics, 77 (2005), 375–410.Google Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.Google Scholar
Amihud, Y., and Mendelson, H.. “Asset Pricing and the Bid–Ask Spread.” Journal of Financial Economics, 17 (1986), 223–249.Google Scholar
Amihud, Y.; Mendelson, H.; and Pedersen, L. H.. “Liquidity and Asset Prices.” Foundations and Trends in Finance, 1 (2006), 269–364.Google Scholar
Atkins, A. B., and Dyl, E. A.. “Transactions Costs and Holding Periods for Common Stocks.” Journal of Finance, 52 (1997), 309–325.Google Scholar
Bao, J.; Pan, J.; and Wang, J.. “The Illiquidity of Corporate Bonds.” Journal of Finance, 66 (2011), 911–946.Google Scholar
Basak, S., and Pavlova, A.. “Asset Prices and Institutional Investors.” American Economic Review, 103 (2013), 1728–1758.Google Scholar
Bekaert, G.; Harvey, C. R.; and Lundblad, C.. “Liquidity and Expected Returns: Lessons from Emerging Markets.” Review of Financial Studies, 20 (2007), 1783–1831.Google Scholar
Ben-Rephael, A. “Flight-to-Liquidity, Market Uncertainty, and the Actions of Mutual Fund Investors.” Journal of Financial Intermediation, 31 (2017), 30–44.Google Scholar
Bongaerts, D.; Jong, F. D.; and Driessen, J.. “Derivative Pricing with Liquidity Risk: Theory and Evidence from the Credit Default Swap Market.” Journal of Finance, 66 (2011), 203–240.Google Scholar
Brennan, M. J., and Zhang, Y.. “Capital Asset Pricing with a Stochastic Horizon.” Journal of Financial and Quantitative Analysis, 55 (2020), 783–827.Google Scholar
Brogaard, J.; Hendershott, T.; and Riordan, R.. “High-Frequency Trading and Price Discovery.” Review of Financial Studies, 27 (2014), 2267–2306.Google Scholar
Bushee, B. J. “The Influence of Institutional Investors on Myopic R&D Investment Behavior.” Accounting Review, 73 (1998), 305–333.Google Scholar
Cella, C.; Ellul, A.; and Giannetti, M.. “Investors’ Horizons and the Amplification of Market Shocks.” Review of Financial Studies, 26 (2013), 1607–1648.Google Scholar
Chalmers, J. M., and Kadlec, G. B.. “An Empirical Examination of the Amortized Spread.” Journal of Financial Economics, 48 (1998), 159–188.Google Scholar
Chen, X.; Huang, J.-Z.; Sun, Z.; Yao, T.; and Yu, T.. “Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market.” Management Science, 66 (2020), 932–957.Google Scholar
Constantinides, G. M. “Capital Market Equilibrium with Transaction Costs.” Journal of Political Economy, 94 (1986), 842–862.Google Scholar
Cremers, M., and Pareek, A.. “Institutional Investors Investment Durations and Stock Return Anomalies: Momentum, Reversal, Accruals, Share Issuance and R&D Increases.” Working Paper, Yale International Center for Finance (2009).Google Scholar
De Jong, F., and De Roon, F. A.. “Time-Varying Market Integration and Expected Returns in Emerging Markets.” Journal of Financial Economics, 78 (2005), 583–613.Google Scholar
De Roon, F. A.; Nijman, T. E.; and Werker, B. J.. “Testing for Mean-Variance Spanning with Short Sales Constraints and Transaction Costs: The Case of Emerging Markets.” Journal of Finance, 56 (2001), 721–742.Google Scholar
Duffie, D. “Presidential Address: Asset Price Dynamics with Slow-Moving Capital.” Journal of Finance, 65 (2010), 1237–1267.Google Scholar
Errunza, V., and Losq, E.. “International Asset Pricing Under Mild Segmentation: Theory and Test.” Journal of Finance, 40 (1985), 105–124.Google Scholar
Franzoni, F.; Nowak, E.; and Phalippou, L.. “Private Equity Performance and Liquidity Risk.” Journal of Finance, 67 (2012), 2341–2373.Google Scholar
Hall, A. R., and Pelletier, D.. “Nonnested Testing in Models Estimated via Generalized Method of Moments.” Economic Theory, 27 (2011), 443–456.Google Scholar
Hansen, L. P., and Jagannathan, R.. “Assessing Specification Errors in Stochastic Discount Factor Models.” Journal of Finance, 52 (1997), 557–590.Google Scholar
Hasbrouck, J. “Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data.” Journal of Finance, 64 (2009), 1445–1477.Google Scholar
Hopenhayn, H. A., and Werner, I. M.. “Information, Liquidity, and Asset Trading in a Random Matching Game.” Journal of Economic Theory, 68 (1996), 349–379.Google Scholar
Hou, K.; Xue, C.; and Zhang, L.. “Replicating Anomalies.” Review of Financial Studies, (2018).Google Scholar
Kamara, A.; Korajczyk, R. A.; Lou, X.; and Sadka, R.. “Horizon Pricing.” Journal of Financial and Quantitative Analysis, 51 (2016), 1769–1793.Google Scholar
Karolyi, A., and Stulz, R.. “Are Financial Assets Priced Locally or Globally?” Handbook of the Economics of Finance, 1 (2003), 975–1020.Google Scholar
Lou, X., and Shu, T.. “Price Impact or Trading Volume: Why Is the Amihud (2002) Measure Priced?” Review of Financial Studies, 30 (2017), 4481–4520.Google Scholar
Merton, R. C. “Optimum Consumption and Portfolio Rules in a Continuous-Time Model.” Journal of Economic Theory, 3 (1971), 373–413.Google Scholar
Næs, R., and Ødegaard, B. A.. “Liquidity and Asset Pricing: Evidence on the Role of Investor Holding Period.” Working Paper, Norwegian School of Management (2009).Google Scholar
Pástor, L., and Stambaugh, R. F.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642–685.Google Scholar
Rivers, D., and Vuong, Q.. “Model Selection Tests for Nonlinear Dynamic Models.” Econometrics Journal, 5 (2002), 1–39.Google Scholar
Sadka, R. “Momentum and Post-Earnings-Announcement Drift Anomalies: The Role of Liquidity Risk.” Journal of Financial Economics, 80 (2006), 309–349.Google Scholar
Sadka, R. “Liquidity Risk and the Cross-Section of Hedge-Fund Returns.” Journal of Financial Economics, 98 (2010), 54–71.Google Scholar
Shanken, J. “On the Estimation of Beta-Pricing Models.” Review of Financial Studies, 5 (1992), 1–55.Google Scholar
Shumway, T. “The Delisting Bias in CRSP Data.” Journal of Finance, 52 (1997), 327–340.Google Scholar
U.S. Securities and Exchange Commission. “Investment Company Liquidity Risk Management Programs.” Available at https://www.sec.gov/rules/final/2016/33-10233.pdf, (2016).Google Scholar
Watanabe, A., and Watanabe, M.. “Time-Varying Liquidity Risk and the Cross Section of Stock Returns.” Review of Financial Studies, 21 (2008), 2449–2486.Google Scholar
Yan, X. S., and Zhang, Z.. “Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?” Review of Financial Studies, 22 (2009), 893–924.Google Scholar
Supplementary material: File

Beber et al. supplementary material

Beber et al. supplementary material

Download Beber et al. supplementary material(File)
File 239.6 KB