Explaining the Magnitude of Liquidity Premia: The Roles of Return Predictability,

ABSTRACT
Constantinides (1986) documents how the impact of transaction costs on per-annum
liquidity premia in the standard dynamic allocation problem with i.i.d. returns is an
order of magnitude smaller than the cost rate itself. Recent papers form portfolios
sorted on liquidity measures and find spreads in expected per-annum return that are
the same order of magnitude as the transaction cost ...