We generate large liquidity premia endogenously from the interaction of transaction costs with convexity in preferences, offering a novel explanation for a longstanding puzzle. We derive this result from the dynamic portfolio problem of mutual fund managers facing either convex flows or year-end...

We examine the problem of an investor who trades in a market with unobservable regime shifts. The investor learns from past prices and is subject to transaction costs. Our model generates significantly larger liquidity premia compared to a benchmark model with observable market shifts. The...

Stock illiquidity is time-varying and predicts future returns, giving investors an option to time liquidity premium. By nature, capturing liquidity premium requires proper management of liquidity cost. We study a dynamic trading model with randomly evolved bid-ask spread and return...