### Abstract

Original language | English |
---|---|

Pages (from-to) | 203-240 |

Number of pages | 38 |

Journal | Journal of Finance |

Volume | 66 |

Issue number | 1 |

Publication status | Published - 2011 |

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*Journal of Finance*,

*66*(1), 203-240.

}

*Journal of Finance*, vol. 66, no. 1, pp. 203-240.

**Derivative pricing with liquidity risk : Theory and evidence from the credit default swap market.** / Bongaerts, D.; de Jong, F.C.J.M.; Driessen, J.J.A.G.

Research output: Contribution to journal › Article › Scientific › peer-review

TY - JOUR

T1 - Derivative pricing with liquidity risk

T2 - Theory and evidence from the credit default swap market

AU - Bongaerts, D.

AU - de Jong, F.C.J.M.

AU - Driessen, J.J.A.G.

N1 - Pagination: 38

PY - 2011

Y1 - 2011

N2 - We derive an equilibrium asset pricing model incorporating liquidity risk, derivatives, and short-selling due to hedging of nontraded risk. We show that illiquid assets can have lower expected returns if the short-sellers have more wealth, lower risk aversion, or shorter horizon. The pricing of liquidity risk is different for derivatives than for positive-net-supply assets, and depends on investors’ net nontraded risk exposure. We estimate this model for the credit default swap market. We find strong evidence for an expected liquidity premium earned by the credit protection seller. The effect of liquidity risk is significant but economically small.

AB - We derive an equilibrium asset pricing model incorporating liquidity risk, derivatives, and short-selling due to hedging of nontraded risk. We show that illiquid assets can have lower expected returns if the short-sellers have more wealth, lower risk aversion, or shorter horizon. The pricing of liquidity risk is different for derivatives than for positive-net-supply assets, and depends on investors’ net nontraded risk exposure. We estimate this model for the credit default swap market. We find strong evidence for an expected liquidity premium earned by the credit protection seller. The effect of liquidity risk is significant but economically small.

M3 - Article

VL - 66

SP - 203

EP - 240

JO - The Journal of Finance

JF - The Journal of Finance

SN - 0022-1082

IS - 1

ER -