Abstract
Abstract An asset is liquid if it can be traded quickly and at low cost. In addition to risk, liquidity affects asset prices and returns. Because investors want to be compensated for bearing the costs of illiquidity, asset returns are increasing in illiquidity . Thus, asset prices should depend on two asset characteristics: risk and liquidity. This article surveys research on the effects of liquidity on asset prices and returns. We find that liquidity is an important factor in capital asset pricing.
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