The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistic, and asks whether liquidity should be regulated given that a capital adequacy requ...

This paper questions existence of illiquidity premium on 8 Central and South East European stock markets. Using the ILLIQ illiquidity measure proposed by Amihud (2002) we investigate liquidity of each stock. Naïve portfolio diversification is applied in forming liquidity sorted portfolios. These portfolios were formed using daily data in the half-year period and in the second part of analysis b...

We investigate the extent to which hedge fund managers smooth self-reported returns. In contrast to prior research on the “anomalous” properties of hedge fund returns, we observe the mechanisms used to price the fund's investment positions and report the fund's performance to investors, thereby allowing us to differentiate between asset illiquidity and misreporting-based explanations. We find t...

This paper analyzes the portfolio decision of an investor facing the threat of illiquidity. In a continuous-time setting, the efficiency loss due to illiquidity is addressed and quantified. For a logarithmic investor, we solve the portfolio problem explicitly. We show that the efficiency loss for a logarithmic investor with 30 years until the investment horizon is a significant 22.7% of current...

Institutions commonly purchase fully utilized, prime properties of “institutional quality,” while other investors buy both underutilized and subprime properties. Managers of institutions with well diversified, liquid portfolios claim to be averse to the additional risk and illiquidity of noninstitutional assets. This behavior and its puzzling explanation are predicted by this dynamic model of c...