The Federal Reserve Board eagle logo links to home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Equilibrium Liquidity Premia
Dahai Yu
1998-615  (June 1998)

Abstract:  This paper studies in a general framework the relative prices of perpetuities with identical dividends and different bid-ask spreads. It establishes four sets of conditions under which the liquidity premium is always positive (i.e., an asset with smaller spread always commands a higher price). To show that the liquidity premium is not necessarily positive, the paper presents two examples of general equilibrium in which the liquidity premium is sometimes negative. The paper also establishes four sets of conditions under which the price-spread relation is convex and uses results on asset price bubbles to establish liquidity premium bounds.

Full paper (66 KB PDF) | Full paper (770 KB Postscript)

Liquidity premium, bid-ask spread, general equilibrium

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 1998 IFDPs
To comment on this site, please fill out our feedback form.
Last update: July 19, 2001