Illiquidity premia

Discussion in 'P2.T8. Investment Management (15%)' started by shanlane, Apr 29, 2012.

  1. shanlane

    shanlane Active Member

    Hello,

    I believe I understand the main idea behind this: if there is autocorrelation in the returns, this means there is a significant chance that the investment vehicle is in some way illiquid.

    The other idea (I thought) was that if an asset was illiquid the returns should be higher, compensating the owner for the illiquidity. However, there are either a couple of really bad typos or the data is completely against this idea. For instance, on p 29 it says "For example, the average return is almost monotonically increasing in portfolio liquidity..."

    Wouldnt this statement suggest that the most liquid portfolios perform the best? This is the complete opposite of the title of the paper!!!

    If so, this paper is awful and should be taken off of the assigned reading list.

    That is my humble opinion.

    ALso, the whole study categorizes the data from "Low" to "high" and never says what that means. Does "High" mean high autocorrelation or high liquidity?

    Thanks,
    Shannon

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