The effect of regime-switching transaction costs and cash dividends on liquidity premia

Jiwon Chae, Bong-Gyu Jang and Taeyoon Kim

International Review of Financial Analysis, 2024, vol. 93, issue C

Abstract: We investigate the effect of the regime-switching transaction costs and dividends on liquidity premium and investor’s optimal strategy. With reasonably calibrated parameters, we show that counter-cyclical transaction costs substantially raise liquidity premium while pro-cyclical dividends amplify this effect. More importantly, we observe that cash dividends can no longer play a role as a liquidity provider if the volatility of pro-cyclical dividends increases. Our model provides a universal framework in the liquidity contexts, so that we can examine the effect of regime switching on liquidity premium for all combinations of regimes in transaction costs and dividends.

Keywords: Liquidity premium; Portfolio choice; Transaction cost; Dividend; Regime switch (search for similar items in EconPapers)
JEL-codes: C61 D11 G11 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:93:y:2024:i:c:s1057521924001182

DOI: 10.1016/j.irfa.2024.103186

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