Pricing Liquidity Risk with Heterogeneous Investment Horizons

49 Pages Posted: 22 Dec 2011

See all articles by Alessandro Beber

Alessandro Beber

Cass Business School; Centre for Economic Policy Research (CEPR)

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management; Tilburg University - Center for Economic Research (CentER)

Patrick Tuijp

University of Amsterdam - Finance Group; Ortec Finance

Multiple version iconThere are 3 versions of this paper

Date Written: December 2011

Abstract

We develop a liquidity-based asset pricing model featuring investors with heterogeneous investment horizons and stochastic transaction costs. In an equilibrium where all investors invest in all assets (integration), we find that the existence of investors with heterogeneous horizons, as opposed to homogeneous horizons, reduces the importance of liquidity risk relative to the standard CAPM market risk and generates a more complex effect of expected liquidity. In an equilibrium where short-term investors do not invest in some more illiquid assets (partial segmentation), our model generates an additional segmentation premium for these assets. We estimate the model for the cross-section of U.S. stocks using GMM and find that our heterogeneous-horizon asset pricing model fares better than a standard liquidity-adjusted CAPM. The segmented version of our model delivers the best cross-sectional fit and generates a substantial effect of expected liquidity on expected returns.

Keywords: investment horizon, liquidity risk

JEL Classification: G11, G12

Suggested Citation

Beber, Alessandro and Driessen, Joost and Tuijp, Patrick and Tuijp, Patrick, Pricing Liquidity Risk with Heterogeneous Investment Horizons (December 2011). CEPR Discussion Paper No. DP8710, Available at SSRN: https://ssrn.com/abstract=1976052

Alessandro Beber (Contact Author)

Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Patrick Tuijp

University of Amsterdam - Finance Group ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Ortec Finance ( email )

Orly Centre
Barajasweg 10
Amsterdam, 1043 CP
Netherlands

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
9
Abstract Views
962
PlumX Metrics