asapercentoffirmvalue,willbegreaterformorevolatile
assets and willincrease with the length of the period for
which trading is restricted.
COST OF ILLIQUIDITY: EMPIRICAL EVIDENCE
Ifweacceptthepropositionthatilliquidityhasacost,thenext
questionsbecomeempiricalones.Howbigisthiscost?What
causesittovaryacrosstimeandacrossassets?Theevidence
ontheprevalenceandthecostofilliquidityisspreadovera
number of asset classes. In this section, we begin by
considering the price attached to illiquidity in the bond
marketandthenmoveontotheequitymarket.Inthefinal
partofthesection,welookattheilliquidityeffectsonprivate
equity investments and real assets.
Bonds
Therearewidedifferencesinliquidityacrossbondsissuedby
differententities,and acrossmaturitiesforbondsissued by
the sameentity. These differences in liquidity offer usan
opportunitytoexaminewhetherinvestorspriceliquidityand
ifso,howmuch,bycomparingtheyieldsofliquidbondswith
otherwise similar illiquid bonds. Studies of bond market
liquidityhavelookedattheTreasurybond,corporate bond,
and subordinated bond markets.
- Treasurybills/bonds.AmihudandMendelson(1991)
comparedtheyieldsonTreasurybondswithlessthan
sixmonths lefttomaturitywith Treasurybillsthat
have the same maturity.
34 Theyconcluded thattheyieldonthelessliquid
Treasury bond was 0.43 percent higher on an