In this paper we survey the theoretical and empirical literature on market liquidity. We organize both literatures around three basic questions: (a) how to measure illiquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. Using a unified model from Vayanos and Wang (2010), we survey theore...

We calculate the socially optimal level of illiquidity in a stylized retirement savings system. We solve the planner’s problem in an economy in which time-inconsistent households face a tradeoff between commitment and flexibility (Amador, Werning and Angeletos, 2006). We assume that the planner can set up multiple accounts for households: a perfectly liquid account and/or partially illiquid ret...

The insurance industry currently discusses to which extend they can integrate an illiquidity premium into their best estimate considerations of insurance liabilities. The present position paper studies this question from an actuarial perspective that is based on marketconsistent valuation. We conclude that mathematical theory does not allow for discounting insurance liabilities with an illiquid...

Abstract In this study, we analyze illiquidity premia and their effect on the expected returns of German real estate securities. To end, use a unique data set that includes stocks, investment trusts (REITs), open- closed-end funds for 2003–2017. We follow Amihud’s (JFM 5:31–56, 2002) structural approach; specifically, estimate factors, investigate relationships between illiquidity, effects unex...

Using the large-scale index-linked exchange-traded fund (ETF) purchase program of Bank Japan (BOJ), we examine role unconventional equity-based monetary policies in market liquidity underlying securities. a large sample Japanese stocks, document significant increase stock illiquidity when firm's ownership by BOJ increases. Intensified ETF arbitrage activities partially mediate such effect. The ...

We examine the impact of institutional trading on stock resiliency during the financial crisis of 2007–2009. We show that buy-side institutions have different exposure to liquidity factors based on their trading style. Liquidity supplying institutions absorb the long-term order imbalances in the market and are critical to recovery patterns after a liquidity shock. We show that these liquidity s...

Article history: Received 2 March 2015 Received in revised form 19 May 2015 Accepted 26 May 2015 Available online 9 June 2015 Wecombine two concepts of informed trading – contrarian trades and stealth trading – to develop proxies for the probability of informed trading. These proxies are used to test the link between informed trading and adverse selection asmeasuredbybid–ask spreads and stock i...

We propose a theory that jointly accounts for an asset illiquidity and for the asset price potential over-reliance on public information. We argue that, when trading frequencies differ across traders, asset prices reflect investors’ Higher Order Expectations (HOEs) about the two factors that influence the aggregate demand: fundamentals information and liquidity trades. We show that it is precis...

We develop a market-wide illiquidity risk factor based on run lengths and find that it is priced using standard asset-pricing specifications. Our theoretical framework of equity returns derives the result that average run lengths are related to common measures of liquidity such as trading volume and trade price-impact. This relationship holds irrespective of the observation frequency in the com...