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Returns on illiquid assets: are they fair games?

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  • John Krainer
  • Stephen F. LeRoy

Abstract

The simplest tests of capital market efficiency are tests of the fair game model: conditional expected returns less the interest rate are equal to zero. The fair game model is thought to obtain only when markets are perfectly liquid. We show that this conjecture is false. In a model of the housing market where heterogeneous agents must search for partners in order to trade, excess returns on housing wealth are fair games if, as is appropriate, returns are defined to include shadow prices measuring illiquidity.

Suggested Citation

  • John Krainer & Stephen F. LeRoy, 1997. "Returns on illiquid assets: are they fair games?," Working Papers in Applied Economic Theory 97-05, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfap:97-05
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    Keywords

    Econometric models; Capital market;

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