Amihud et al - Market Liquidity; Asset Pricing, Risk, and Crises (2013).pdf

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MARKET LIQUIDITY
This book presents the theory and evidence on the effect of market liquidity
and liquidity risk on asset prices and on overall securities market performance.
Illiquidity means incurring high transaction cost, which includes a large price
impact when trading and facing a long time to unload a large position. Liquidity
risk is higher if a security becomes more illiquid when it needs to be traded in the
future, which will raise its trading cost. The analysis in this book shows that higher
illiquidity and greater liquidity risk reduce securities prices and raise the expected
return that investors require as compensation. Aggregate market liquidity is linked
to funding liquidity, which affects the provision of liquidity services. When these
become constrained, there is a liquidity crisis, which leads to downward price and
liquidity spiral. Overall, this book demonstrates the important role of liquidity in
asset pricing.
Yakov Amihud is the Ira Rennert Professor of Finance at the Stern School of
Business, New York University. His research focuses on the effects of the liquidity
of stocks and bonds on their returns and values, and the design and evaluation
of securities markets’ trading methods and systems. On these topics, Professor
Amihud has advised the New York Stock Exchange, American Stock Exchange,
Chicago Board of Options Exchange, Chicago Board of Trade, and other securities
markets. He has published more than ninety research articles on economics and
finance in professional journals and in books, and has edited and co-edited five
books on securities market design, international finance, leveraged buyouts, and
bank mergers and acquisitions.
Haim Mendelson is the Kleiner Perkins Caufield & Byers Professor of Electronic
Business and Commerce, and Management, at the Graduate School of Business,
Stanford University. His research interests include securities markets, electronic
markets, information technology, and the information industries. He was elected
Distinguished Fellow of the Information Systems Society in recognition of out-
standing intellectual contributions to the discipline. Professor Mendelson has
published more than one hundred research papers in professional journals and
has consulted for high-tech companies, financial institutions, and securities mar-
kets including the New York Stock Exchange, American Stock Exchange, Chicago
Board of Options Exchange, and Chicago Board of Trade.
Lasse Heje Pedersen is the John A. Paulson Professor of Finance and Alternative
Investments at the Stern School of Business, NYU, and a principal at AQR Capital
Management. He has been part of the Liquidity Working Group of the Federal
Reserve Bank of New York, the New York Fed’s Monetary Policy Panel, the Board of
Directors of the American Finance Association, the Economic Advisory Boards of
NASDAQ and FTSE, and associate editor at the
Journal of Finance, Journal of Eco-
nomic Theory, Review of Asset Pricing Studies,
and
Quarterly Journal of Economics.
His research explains how crises can arise from liquidity spirals and how market
and funding liquidity risks explain equity returns, bond yields, option prices, and
currency crashes. Professor Pedersen received the 2011 Bern` cer Prize to the best
a
European Union economist under 40 years of age.
Market Liquidity
Asset Pricing, Risk, and Crises
YAKOV AMIHUD
Stern School of Business, New York University
HAIM MENDELSON
Graduate School of Business, Stanford University
LASSE HEJE PEDERSEN
Stern School of Business, New York University

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