Transaction Cost Can Have A First-Order Effect on Liquidity Premium
Constantinides (1986) finds that although transaction cost alters trading strategy significantly, it only has a second-order effect on the liquidity premia. We show that his conclusion depends crucially on his assumption of constant investment opportunity set. In contrast, in a stochastic regime-switching model with transaction cost, we find that transaction cost can have a first-order effect on the liquidity premia. In addition, we show that concerns over a potential liquidity crash, no matter how unlikely it is, can dramatically reduce investment in stock even when the current market is perfectly liquid and the equity premium is high. This suggests that the existence of liquidity risk may largely explain the Equity-Premium Puzzle.
Liquidity Liquidity risk Investment Consumption Equity-Premium Puzzle.
Bong-Gyu Jang Hyeng Keun Koo Hong Liu Mark Loewenstein
Department of Mathematics, KAIST Department of Business Administration of Ajou University, Korea Olin school of Business of Washington University in St. Louis Robert H. Smith School of Business of University of Maryland
国际会议
昆明
英文
2005-07-05（万方平台首次上网日期，不代表论文的发表时间）