Abstract
This paper determines the value of asset tradeability in an option pricing framework. In our model, tradeability is valuable since it allows investors to exploit temporary mispricings of stocks. The model delivers several novel insights on the value of tradeability: The value of tradeability is the larger, the higher the pricing efficiency of the market is. Uncertainty increases the value of tradeability, no matter whether the uncertainty results from noise trading or from new information about the fundamental value of the stock. The value of tradeability is the larger, the longer the illiquid stock cannot be traded and the more trading dates the liquid stock offers.
Similar content being viewed by others
References
Acharya V., Pedersen L. (2005) Asset pricing with liquidity risk. Journal of Financial Economics 77(2): 375–410
Amihud Y., Mendelson H. (1986) Asset pricing and the bid-ask spread. Journal of Financial Economics 17(2): 223–249
Amihud Y., Mendelson H. (1989) The effects of beta, bid-ask spread, residual risk, and size on stock returns. The Journal of Finance 44(2): 479–486
Amihud Y., Mendelson H., Pedersen L. (2005) Liquidity and asset prices. Foundations and Trends in Finance 1(4): 269–364
Brennan M., Schwartz E. (1990) Arbitrage in stock index futures. Journal of Business 63(1): S7–S31
Brenner M., Eldor R., Hauser S. (2001) The price of options illiquidity. The Journal of Finance 56(2): 789–805
Chordia T., Roll R., Subrahmanyam A. (2005) Evidence of speed of convergence to market efficiency. Journal of Financial Economics 76(2): 271–292
DeBondt W., Thaler R. (1985) Does the stock market overreact?. The Journal of Finance 40(3): 793–805
DeBondt W., Thaler R. (1989) Anomalies. A mean-reverting walk down Wall Street. Journal of Economic Perspectives 3(1): 189–202
Fama E., French K. (1988) Permanent and temporary components of stock prices. Journal of Political Economy 96(2): 246–273
Grinblatt, M. (2002). An analytic solution for interest rate SWAP spreads. Working Paper, Yale ICF.
Handa P., Schwartz R. (1996) How best to supply liquidity to a securities market. Journal of Portfolio Management 22(2): 44–51
Kempf A., Uhrig-Homburg M. (2000) Liquidity and its impact on bond prices. Schmalenbach Business Review 52(1): 26–44
Koziol C., Sauerbier P. (2007) Valuation of bond illiquidity: An option-theoretical approach. Journal of Fixed Income 16(4): 81–107
Longstaff F. (1995) How much can marketability affect security values. The Journal of Finance 50(5): 1767–1774
Longstaff F. (2009) Portfolio claustrophobia: Asset pricing in markets with illiquid assets. American Economic Review 99(4): 1119–1144
Poterba J., Summers L. (1988) Mean reversion in stock prices—evidence and implications. Journal of Financial Economics 22(1): 27–59
Silber W. (1991) Discounts on restricted stock: The impact of illiquidity on stock prices. Financial Analysts Journal 47(4): 60–64
Vayanos D. (1998) Transaction costs and asset prices: A dynamic equilibrium model. Review of Financial Studies 11(1): 1–58
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Chesney, M., Kempf, A. The value of tradeability. Rev Deriv Res 15, 193–216 (2012). https://doi.org/10.1007/s11147-012-9074-0
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11147-012-9074-0