Published in:Netspar Discussion Paper ; No. 12/2015-049
Extent:
1 Online-Ressource (53 p)
Language:
English
DOI:
10.2139/ssrn.2711718
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments December 19, 2016 erstellt
Description:
Recent empirical work documents large liquidity risk premiums in stock markets. We calculate the liquidity risk premiums demanded by large investors by solving a dynamic portfolio choice problem with stochastic price impact of trading, CRRA utility and a time-varying investment opportunity set. We find that, even with high trading-cost rates and substantial trading motives, the theoretically demanded liquidity risk premium is negligible, less than 3 basis points per year. Assuming forced selling during market downturn enlarges the liquidity risk premium to maximally 20 basis points per year, which is well below existing empirical estimates of the liquidity risk premium