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The value of tradeability

Author

Listed:
  • Chesney, Marc
  • Kempf, Alexander
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 mis-pricings 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 tradeablity, 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.

Suggested Citation

  • Chesney, Marc & Kempf, Alexander, 2011. "The value of tradeability," CFR Working Papers 10-11 [rev.], University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1011r
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    File URL: https://www.econstor.eu/bitstream/10419/70123/1/736362363.pdf
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    References listed on IDEAS

    as
    1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
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    3. Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," The Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 1-58.
    4. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    5. Amihud, Yakov & Mendelson, Haim & Pedersen, Lasse Heje, 2006. "Liquidity and Asset Prices," Foundations and Trends(R) in Finance, now publishers, vol. 1(4), pages 269-364, February.
    6. Alexander Kempf & Marliese Uhrig-Homburg, 2000. "Liquidity And Its Impact On Bond Prices," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 52(1), pages 26-44, January.
    7. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
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    Cited by:

    1. Rao, Ramesh K.S., 2015. "The public corporation as an intermediary between “Main Street” and “Wall Street”," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 64-82.

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    More about this item

    Keywords

    tradeability; liquidity; option pricing;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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