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Comment: The Effect of Interest-Rate Risk on Liquidity Premiums: An Empirical Investigation

Published online by Cambridge University Press:  19 October 2009

Burton Zwick
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Extract

The classic article about liquidity premiums is Kessel [3]. Kessel regresses the liquidity premium, measured as the difference between the forward rate and the actual future spot rate, against the current spot rate and observes a positive relation between the level of the current spot rate and the size of the liquidity premium. Olsen alters Kessel's model in two respects. First, he introduces a proxy for risk or uncertainty about interest rates as an additional determinant of the liquidity premium. Second, instead of using the actual future spot rate as a measure of the expected future spot rate, he specifies the expected future spot rate as a linear combination of the current and past spot rates.

Type
Kenneth Trefftzs Student Award
Information
Journal of Financial and Quantitative Analysis , Volume 9 , Issue 5 , November 1974 , pp. 911 - 913
Copyright
Copyright © School of Business Administration, University of Washington 1974

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References

REFERENCES

[1]Gibson, W. “Price-Expectations Effects on Interest Rates.” Journal of Finance, vol. 25 (March 1970), pp. 19–34.Google Scholar
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