Liquidity and Asset Prices

Even though, due to advances in asset pricing theory, we are now endowed with a solid set of theories that allow us to value assets under an increasingly realistic set of assumptions, we still don’t have a good understanding of the relation between liquidity and asset prices. This probably has to do with the elusive nature of the concept of liquidity which prevents the emergence of a pragmatic functional relationship with the values of assets. Yet, there are many instances that illiquidity or lack of marketability may play a significant factor in the determination of asset prices. Such issues are for example important in valuing privately held companies, Rule 144 restrictions, or even valuing sovereign assets in financial distress. Here we review some important and recent advances in the area of pricing illiquid or nonmarketable assets.