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 ?
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 i.
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).