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Liquidity Cost Premia

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  • Samih Azar

Abstract

The purpose of the paper is to find out the borrowing cost premia for those individuals who are liquidity-constrained, or who are first-time buyers of real estate. The analysis uses the similarity of a leveraged purchase with the exercise of a call option to defer the purchase of the asset. Sensible parameters are selected for the option, and simulations are run to identify the cost premia. The main conclusion is that these borrowing costs are prohibitive in central tendency and in dispersion. This means that liquidity-constrained individuals may be given borrowing quotations, but these quoted rates are so high and variable that these individuals are unwilling to borrow. Copyright International Atlantic Economic Society 2006

Suggested Citation

  • Samih Azar, 2006. "Liquidity Cost Premia," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 12(4), pages 461-467, November.
    • Handle: RePEc:kap:iaecre:v:12:y:2006:i:4:p:461-467:10.1007/s11294-006-9040-4
    DOI: 10.1007/s11294-006-9040-4
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    References listed on IDEAS

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    More about this item

    Keywords

    C88; E43; G13; liquidity constraints; borrowing cost premia; call option to defer; real estate economics; computer simulation;
    All these keywords.

    JEL classification:

    • C88 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Other Computer Software
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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