Economics at your fingertips  

Liquidity might come at cost: The role of heterogeneous preferences

Shmuel Hauser and Haim Kedar-Levy

Journal of Financial Markets, 2018, vol. 39, issue C, 1-23

Abstract: Asset-pricing models with volume are challenged by the high turnover-rates in real stock markets. We develop an asset-pricing framework with heterogeneous risk preferences and show that liquidity and turnover increase with heterogeneity to a maximum, and then decline. With U.S. parameters, turnover exceeds 55%. Liquidity is costly since it facilitates a large share redistribution across agents, causing changes in average risk aversion, which increases Sharpe ratio variability, and hence stock return volatility. Illiquidity and its risk are minimized at moderate heterogeneity levels, highlighting an "optimal" heterogeneity level, yet, there is no "optimal" combination between liquidity level and Sharpe ratio variability.

Keywords: Heterogeneity; Discount rate risk; Turnover; Liquidity; Sharpe ratio (search for similar items in EconPapers)
JEL-codes: C61 D53 E44 G11 G12 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2018-08-04
Handle: RePEc:eee:finmar:v:39:y:2018:i:c:p:1-23