Editing Market liquidity (section)

==Effect on asset values==
The market liquidity of assets affects their prices and expected returns. Theory and empirical evidence suggest that investors require higher return on assets with lower market liquidity to compensate them for the higher cost of trading these assets.<ref>Yakov Amihud and Haim Mendelson, "Asset Pricing and the Bid-Ask Spread", Journal of Financial Economics 17, 1986.</ref> That is, for an asset with given cash flow, the higher its market liquidity, the higher its price and the lower is its expected return. In addition, risk-averse investors require higher expected return if the asset's market-liquidity risk is greater.<ref>Viral Acharya and Lasse Heje Pedersen, "Asset pricing with liquidity risk", Journal of Financial Economics 77, 2005.</ref> This risk involves the exposure of the asset return to shocks in overall market liquidity, the exposure of the asset's own liquidity to shocks in market liquidity and the effect of market return on the asset's own liquidity. Here too, the higher the liquidity risk, the higher the expected return on the asset or the lower is its price.<ref>See a review in Amihud, Mendelson, and Pedersen, Market Liquidity, Cambridge University Press, 2013. http://www.cambridge.org/bus/catalogue/catalogue.asp?isbn=9780521139656{{page needed|date=January 2017}}</ref>

One example of this is a comparison of assets with and without a liquid secondary market.  The liquidity discount is the reduced promised yield or expected return for such assets, like the difference between newly issued U.S. Treasury bonds compared to [[off the run]] treasuries with the same term to maturity.  Initial buyers know that other investors are less willing to buy off-the-run treasuries, so the newly issued bonds have a higher price (and hence lower yield).<ref>{{cite journal |last1=Longstaff |first1=Francis A |title=The Flight‐to‐Liquidity Premium in U.S. Treasury Bond Prices |date=2004 |journal=The Journal of Business |volume=77 |issue=3 |pages=511–526 |doi=10.1086/386528 |edition=77(3) |url=https://doi.org/10.1086/386528 |access-date=26 September 2022}}</ref>