that is, sold. Traders have long recognized the importance of liquidity, and some evidence suggests that illiquidity can reduce market prices substantially. For example, one study14 finds that market discounts on closely held (and therefore nontraded) firms can exceed 30%. The nearby box focuses on the relationship between liquidity and stock returns. A rigorous treatment of the value of liquidity was developed by Amihud and Mendel- son.15 Recent studies show that liquidity plays an important role in explaining rates of return on financial assets.16 For example, Chordia, Roll, and Subrahmanyam17 find     13 Eugene F. Fama, "Multiperiod Consumption-Investment Decisions," American Economic Review 60 (1970). 14 Shannon P. Pratt, Valuing a Business: The Analysis of Closely Held Companies, 2nd ed. (Homewood, Ill.: Dow Jones-Irwin, 1989). 15 Yakov Amihud and Haim Mendelson, "Asset Pricing and the Bid-Ask Spread," Journal of Financial Economics 17 (1986), pp. 223-49. 16 For example, Venkat Eleswarapu, "Cost of Transacting and Expected Returns in the NASDAQ Market," Journal of Finance 2, no. 5 (1993), pp. 2113-27. 17 Tarun Chordia, Richard Roll, and Avanidhar Subrahmanyam, "Commonality and Liquidity," Journal of Financial Economics, April 2000. III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001           STOCK INVESTORS PAY HIGH PRICE FOR LIQUIDITY       Given a choice between liquid and illiquid stocks, most investors, to the extent they think of it at all, opt for is- sues they know are easy to get in and out of. But for long-term investors who dont trade often- which includes most individuals-that may be unneces- sarily expensive. Recent studies of the performance of listed stocks show that, on average, less-liquid issues generate substantially higher returns-as much as sev- eral percentage points a year at the extremes. . . .   Illiquidity Payoff Among the academic studies that have attempted to quantify this illiquidity payoff is a recent work by two fi- nance professors, Yakov Amihud of New York