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Inter-temporal variation in the illiquidity premium

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  • Jensen, Gerald R.
  • Moorman, Theodore

Abstract

We find evidence of a systematic link between monetary conditions and inter-temporal variation in the price of liquidity. Specifically, following an expansive monetary policy shift, funding conditions improve and market-wide liquidity increases, which is especially beneficial for illiquid securities. The improved liquidity and funding conditions reduce the returns required for holding illiquid securities. Consequently, illiquid stocks experience relatively large price increases when monetary conditions become expansive, and thus, the measured return spread between illiquid and liquid stocks expands substantially. Overall, our evidence supports the claim that the price of asset liquidity is dependent on monetary conditions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 98 (2010)
Issue (Month): 2 (November)
Pages: 338-358

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Handle: RePEc:eee:jfinec:v:98:y:2010:i:2:p:338-358

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Illiquidity Liquidity Asset pricing Funding conditions Monetary conditions;

References

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Citations

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Cited by:
  1. Florackis, Chris & Kontonikas, Alexandros & Kostakis, Alexandros, 2013. "Stock Market Liquidity and Macro-Liquidity Shocks: Evidence from the 2007-2009 Financial Crisis," SIRE Discussion Papers 2013-58, Scottish Institute for Research in Economics (SIRE).
  2. Xue, Yi & Gençay, Ramazan, 2012. "Trading frequency and volatility clustering," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 760-773.
  3. Paul Goebel & David Harrison & Jeffrey Mercer & Ryan Whitby, 2013. "REIT Momentum and Characteristic-Related REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 564-581, October.
  4. Hagströmer, Björn & Nilsson, Birger & Hansson, Björn, 2011. "The components of the illiquidity premium: An empirical analysis of U.S. stocks 1927-2010," Working Papers 2011:24, Lund University, Department of Economics.

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