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Liquidity Cost Premia

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  • Samih Azar

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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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    1. Spencer, Peter D., 2000. "The Structure and Regulation of Financial Markets," OUP Catalogue, Oxford University Press, number 9780198776109.
    2. W. Scott Frame & Lawrence J. White, 2005. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 159-184, Spring.
    3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    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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