Published Online: 15 MAY 2010
Copyright © 2010 John Wiley & Sons, Ltd. All rights reserved.
Encyclopedia of Quantitative Finance
How to Cite
Amihud, Y. and Mendelson, H. 2010. Liquidity Premium. Encyclopedia of Quantitative Finance. .
- Published Online: 15 MAY 2010
An asset is liquid if it can be traded quickly and at low cost. In addition to risk, liquidity affects asset prices and returns. Because investors want to be compensated for bearing the costs of illiquidity, asset returns are increasing in illiquidity. Thus, asset prices should depend on two asset characteristics: risk and liquidity. This article surveys research on the effects of liquidity on asset prices and returns. We find that liquidity is an important factor in capital asset pricing.
- liquidity and asset pricing;
- liquidity risk premium;
- market microstructure;
- transaction costs