The Effects of the Illiquidity Premium on the Return of Securities and the Importance for Eurasia
Dr. Serdar KUZU
Abstract
This study investigates the illiquidity premium, which has major impacts on Eurasia Economics and its term
structure. In this study, the effects of the term structure of the illiquidity premium on government and corporate
bonds and “the return of securities – illiquidity premium – expectation theory relationship” are investigated
through various parameters and formulations. Consequently, the study draws upon the study of Kempf, Korn and
Uhrig-Homburg which is conducted in 2009 and aims to investigate relations between German public sector’s
bonds and private sector’s bonds. It is found that illiquidity premium varies in short, medium and long terms
depending upon different factors and the curve that connects illiquidity premiums with different terms is a U
shaped curve. Studies that use traditional methods in asset pricing evaluate the illiquidity premium as a
systematic risk criterion. However, illiquidity is a risk factor that should be investigated alone instead of being
investigated together with all of the risk factors. Financial market makers aim to make arrangements that remove
the problems arising from the level of liquidity, in other words increase the level of liquidity, and contribute to the
formation of efficient price. Further studies in this field will be very important in the development process of
corporate bonds market with the decrease of interest rates in international markets and the issue of new
corporate bonds in developing countries recently.
Full Text: PDF