How can the liquidity premium explain both why publicly traded stocks are valued higher than private stock, and why illiquid assets have higher returns? In the technical questions guide, the liquidity premium is used to explain why a public company is worth more (liquidity and transparency). However, in my classes I've also learned that illiquid assets (real estate, art, timber) give higher returns because they are difficult to offload. So which is it?? Google is telling me both are the correct answer.

Remember, higher price now=lower future returns, all else equal. This relationship is more obvious in fixed income terms but applies to stocks as well. A liquidity premium means that you pay a higher price for the security then you would otherwise given its other attributes. Imagine two fixed income securities with par value of $100. They are equal in all ways except one is liquid and the other is not. The liquid security trades for $95, while the illiquid security trades for $80.

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