Returns on illiquid assets: are they fair games?

John Krainer and Stephen LeRoy

No 97-05, Working Papers in Applied Economic Theory from Federal Reserve Bank of San Francisco

Abstract: The simplest tests of capital market efficiency are tests of the fair game model: conditional expected returns less the interest rate are equal to zero. The fair game model is thought to obtain only when markets are perfectly liquid. We show that this conjecture is false. In a model of the housing market where heterogeneous agents must search for partners in order to trade, excess returns on housing wealth are fair games if, as is appropriate, returns are defined to include shadow prices measuring illiquidity.

Keywords: Econometric models; Capital market (search for similar items in EconPapers)
Date: 1997
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