The pricing of illiquidity and illiquid assets: Essays on empirical asset pricing

This dissertation studies the pricing of liquidity and illiquid assets. For this thesis, liquidity will generally refer to the ease with which an asset can be traded. The first chapter investigates the role of the investment horizon in the impact of illiquidity on stock prices. We obtain a clientele effect where short-term investors choose not to invest in the least liquid assets, as their expected returns are not sufficient to cover expected transaction costs. The least liquid assets are held by less liquidity-sensitive long-term investors. This feature allows us to better explain the cross-section of U.S. stock returns than a single-horizon model. The second chapter studies the pricing of house-specific risk for U.S. residential real estate. We show that house-specific risk is priced and we show that the extent to which it is priced increases with a proxy for the degree of underdiversification. The third chapter studies the impact of time-variation in liquidity on stock prices. It distinguishes between an overall deterioration in liquidity and a situation where only the least liquid assets become even less liquid. The results show that only the risk of an overall deterioration in liquidity is relevant for U.S. stock prices.