liquidity premium

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Liquidity premium

Liquidity Premium

The rate of return that an investor expects above other rates or return in order to make an illiquid investment. All other things being equal, an investor generally expects a higher return for investing in something that may be difficult to convert to cash. For example, an inactive bond may pay a higher coupon rate than an active bond with a similar credit rating.

liquidity premium

The extra return demanded by investors as compensation for holding assets that may be difficult to convert into cash. For example, bonds that seldom trade should offer a higher yield to maturity compared to actively traded bonds of similar maturity and credit risk.
References in periodicals archive ?
Fostering long-term finance is currently constrained by biased regulatory requirements, challenges to perform sustainability assessment on the long-term, or demand for higher risk and liquidity premiums, thus making projects less viable from an economic and finance perspective.
Finally, through the liquidity channel, LSAPs can help to calm markets during times of financial stress, and lower interest rates by reducing risk or liquidity premiums. (10)
Later, Amihud and Mendelson (1989) empirically tested this phenomenon and confirmed that there exist liquidity premiums even after controlling for other systematic risk factors such as market beta and size.
The level of the Baa-Treasury spread may be affected by factors other than safety and liquidity premiums (for example, the average default probability of corporate bonds).
They also reflect inflation and liquidity premiums, and the fact that financial markets have been quite volatile recently may have affected these premiums.
One might think of these assets as being ordered according to the size of their liquidity premiums: government-issued cash first, then bank demand deposits, then Treasury bills and other money market instruments, and so on.
A study of liquidity for real property during 1970-1988, conducted by David Leggett, found mean liquidity premiums of 288 basis points to 370 basis points.
Once yields, risk spreads, volatility or liquidity premiums get so low, there is less and less incentive to take risk.
Credit union management teams should earn liquidity premiums for being a long-run investor and liquidity provider, originate quality loans and diversify them into a portfolio, and develop a core funding base and service clients.
"Granted, Chairman Bernanke has frequently admitted as much but cites the hopeful conclusion that once real growth has been restored to 'old normal,' then the financial markets can return to those historical levels of yields, carry, volatility and liquidity premiums that investors yearn for.
"With banks in a deleveraging mode, this could be a pivotal moment for institutional investors, whose pools of patient capital could finance infrastructure and other types of investment," McKinsey said, adding that policy could encourage greater harvesting of "liquidity premiums".
"Effectively there is a much more level playing field now and that's going to get even more advantageous to the local regional banks because a lot of European banks will see an increase in the lPs (liquidity premiums) over the next 12 months," said Perry.