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The "Ostrich Effect" and the Relationship between the Liquidity and the Yields of Financial Assets


  • Dan Galai

    (The Hebrew University of Jerusalem)


This article documents that government T-bills provided a higher yield to maturity than an equally risky illiquid asset (bank deposits) in Israel. The difference between the return on the liquid asset relative to the illiquid asset is higher in periods of greater uncertainty. This cannot be attributed to taxes, risk, or transaction costs. We suggest that the observed puzzle is due to the positive correlation between liquidity and the flow of market information. We use the term "ostrich effect" to describe investor behavior, since ostriches are believed to treat apparently risky situations by pretending they do not exist.

Suggested Citation

  • Dan Galai, 2006. "The "Ostrich Effect" and the Relationship between the Liquidity and the Yields of Financial Assets," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2741-2759, September.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:5:p:2741-2740

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    Cited by:

    1. Lin, Mei-Chen, 2015. "Seasonal affective disorder and investors’ response to earnings news," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 211-221.
    2. Marianne Andries & Valentin Haddad, 2017. "Information Aversion," NBER Working Papers 23958, National Bureau of Economic Research, Inc.
    3. Valentin Haddad & Marianne Andries, 2014. "Information Aversion," 2014 Meeting Papers 1091, Society for Economic Dynamics.
    4. Gherzi, Svetlana & Egan, Daniel & Stewart, Neil & Haisley, Emily & Ayton, Peter, 2014. "The meerkat effect: Personality and market returns affect investors’ portfolio monitoring behaviour," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 512-526.
    5. Marco Pleßner, 2017. "The disposition effect: a survey," Management Review Quarterly, Springer;Vienna University of Economics and Business, vol. 67(1), pages 1-30, February.

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