The "ostrich effect" and the relationship between the liquidity and the yields of financial assets

Dan Galai*, Orly Sade

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

60 Scopus citations

Abstract

This article documents that government T-bills provided a higher yield to maturity than an equally risky illiquid asset (bank deposits) in Israel. The difference between the return on the liquid asset relative to the illiquid asset is higher in periods of greater uncertainty. This cannot be attributed to taxes, risk, or transaction costs. We suggest that the observed puzzle is due to the positive correlation between liquidity and the flow of market information. We use the term "ostrich effect" to describe investor behavior, since ostriches are believed to treat apparently risky situations by pretending they do not exist.

Original languageAmerican English
Pages (from-to)2741-2759
Number of pages19
JournalJournal of Business
Volume79
Issue number5
DOIs
StatePublished - Sep 2006

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