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Measuring a Premium for Liquidity Risk

Liquidity risk is a separate risk distinct from the economic fundamentals that determine valuations in the stock and bond markets. It is a risk that arises from investing in an asset that cannot be sold in a timely manner, or can only be sold at a large discount. However, measuring a consistent premium for liquidity risk across asset classes has not been accomplished. This article provides a framework for measuring liquidity risk and calculating a premium for that risk.