| Abstract: | Similar to Cagan's study, this thesis is an empirical analysis of the determinants of the liquidity premium. These determinants will be examined, using linear regression analysis, as to their degree of influence on the liquidity premium relative to the level of interest rates. These empirical results will be presented in the fourth section. The question of how liquidity premiums fluctuate as interest rates change is not settled. Two leading theories, the money substitute theory and the "normal" level of interest rates theory, have opposing conclusion addressing this issue. This study will attempt to produce results supportive of one of these theories. The fifth section will offer conclusions and implications regarding the regression analysis results. Current research has not yet been successful in measuring the liquidity premium and it fluctuations. Improvements in the technique of measuring, analyzed and used in this study, may prove helpful in further analysis of this problem. |
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