A comparison of TIPS' lack of liquidity with nominal Treasuries results in TIPS yields having a liquidity premium
relative to Treasuries.
In this case, if u'(q) = c'(q), trade is efficient and the marginal liquidity premium
is zero--in short, money does not carry a liquidity premium
because trade is already efficient.
For fixed income pricing we rely upon the liquidity premium
theory, and give special consideration to how the expectation of future interest rates are determined.
From that perspective, I think what we've seen, especially with the bigger companies, is the shift from public to private to pick up the liquidity premium
as opposed to employing the other levers.
After interviewing market participants and reviewing bondable real estate transactions, a liquidity premium
of 100 basis points (33% of the Treasury yield in Table 2) was estimated.
The government debt of small nations attracts a liquidity premium
Machado & De Medeiros (2011) analyzed the existence of a liquidity premium
in the Brazilian market and also investigated whether it is priced and explains part of the variation in asset returns.
There is also a liquidity premium
between the two different bond categories.
In this article, the liquidity premium
for European financial institutions in the bond market is estimated by measuring the deviation between an index that measures total risk premiums and an index of CDS prices (see Chart 15).
We have increased our estimate of KAMAZ's liquidity premium
from 3% to 4% on the back of its very narrow free float and lowered the company's tax rate from 24% to 20% following changes to Russian tax regulations.
The spread itself indicates the magnitude of the liquidity premium
for immediate convertibility of an asset into cash, it also reflects the risk that a financial institution could fail to meet its contractual obligations.
D'Amico, Kim, and Wei estimate that the liquidity premium
in the ten-year TIPS yield was as large as 200 basis points in the early years of the program (Chart 4).