Liquidity premium
In
Assets that are traded on an
Pricing Liquidity Premium
Practitioners struggle with the valuation of illiquid securities. Longstaff (1995)[2] calculates the upper bound for this premium by assuming that without trading restrictions, an investor with perfect market-timing ability can sell a security at its maximum price during the period in which the security is restricted from trading. Thus, the upper bound for the liquidity premium is priced as the difference between this maximum price during the restricted trading period and the security price at the end of this period. Abudy and Raviv (2016) [3] extend this framework for the special case of corporate bonds by using a structural approach for pricing a corporate security. Consistent with the empirical literature the liquidity premium is positively related to the issuing firm's asset risk and leverage ratio and increases with a bond's credit quality. The term structure of illiquidity spread has a humped shape, where its maximum level depends on the firm's leverage ratio.
See also
References
- ^ Bowyer, Jerry. "What Is the Liquidity Premium? What Does It Mean?". Forbes. Retrieved 2015-08-30.
- ISSN 1540-6261.
- ISSN 1572-3089.