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 ?
For instance, if [theta] is no longer set to 1, the liquidity premium theory resumes its rich dynamics.
Compared with the beginning of 1999, the liquidity premium in 10-year TIPS has declined about 0.24 percentage point, while the liquidity risk premium in the 5-year TIPS has declined only 0.08 percentage point.
Hence, according to this clientele theory, the liquidity premium ([r.sup.*j] - [r.sup.f]) + [[mu].sup.j] [C.sup.i] / [P.sup.i] for relatively illiquid securities arise largely from the rents ([r.sup.*j] - [r.sup.f]) and less from the amortized spread because the relevant [[mu].sup.j] is small.
(22.) Christenson (2001) argues that the two GSEs plan to issue sufficient subordinated debt so that the liquidity premium should be tiny.
When attempting to estimate the size of New Zealand's default and liquidity premium versus the United States it is important to recognise that default premia are likely to depend on the time until maturity.
Failure to adjust for a liquidity premium would represent a major flaw in an appraisal report on a company without equity and that is actively traded in the market.
The Fed introduced the TAF based on the belief that the increase in the spreads between term LIBOR rates and equivalent-term Treasury or OIS rates at the onset of the financial crisis was due to an increase in the liquidity premium in the interbank market.
These market measures are subject to different premia such as a liquidity premium, and the 5-year, 5-year measure tries to minimize such effects.
Some 69 per cent of participants think that the "liquidity premium of hedge fund strategies will disappear and that performance will fall" when hedge fund strategies are structured as UCITS.
This implies that on average, investors demand a risk or liquidity premium for holding TIPS rather than nominal Treasuries.
The challenge is to work out how to benefit from current "abnormal pricing"; three areas need investigation: the liquidity premium; debt and credit markets; and the market timing opportunities in both equities and commodities.
Whereas all previous studies used a measure of liquidity as a factor, Liu (2004b) uses a factor-mimicking stock portfolio that reflects the liquidity premium, constructed in a similar way to the Fama-French SMB and HML factors.