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Liquidity Premia and Transaction Costs
Abstract
Standard literature concludes that transaction costs only have a second‐order effect on liquidity premia. We show that this conclusion depends crucially on the assumption of a constant investment opportunity set. In a regime‐switching model in which the investment opportunity set varies over time, we explicitly characterize the optimal consumption and investment strategy. In contrast to the standard literature, we find that transaction costs can have a first‐order effect on liquidity premia. However, with reasonably calibrated parameters, the presence of transaction costs still cannot fully explain the equity premium puzzle.
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Citations
Cited by
Amihud, Y., Mendelson, H., & Pedersen, L. H. (2005) · Foundations and Trends® in Finance · doi:10.1561/0500000003 · Cited by 820
Does Speculation in Financial Markets Have Real Effects?
Li, T., & Loewenstein, M. (2014) · doi:10.2139/ssrn.2423360 · Cited by 4
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Metadata
- Authors
- JANG, B., KEUN KOO, H., LIU, H., & LOEWENSTEIN, M.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2007-09-04
- Volume
- 62
- Issue
- 5
- Pages
- 2329-2366
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2126696639
- Cited by
- 164
- References
- 0
- FWCI
- 17.71
- Type
- journal article
- Language
- en
- Open access
- closed
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- JANG, B., KEUN KOO, H., LIU, H., & LOEWENSTEIN, M. (2007). Liquidity Premia and Transaction Costs. The Journal of Finance. https://doi.org/10.1111/j.1540-6261.2007.01277.x
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Bibliographic data: Semantic Scholar, OpenAlex, Crossref.
Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
