The "Ostrich Effect" and the Relationship between the Liquidity and the Yields of Financial Assets

Dan Galai
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Dan Galai: The Hebrew University of Jerusalem

Journal of Business, 2006, vol. 79, issue 5, pages 2741-2740

Abstract: This article documents that government T-bills provided a higher yield to maturity than an equally risky illiquid asset (bank deposits) in Israel. The difference between the return on the liquid asset relative to the illiquid asset is higher in periods of greater uncertainty. This cannot be attributed to taxes, risk, or transaction costs. We suggest that the observed puzzle is due to the positive correlation between liquidity and the flow of market information. We use the term "ostrich effect" to describe investor behavior, since ostriches are believed to treat apparently risky situations by pretending they do not exist.

Date: 2006

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