This paper develops a present-value framework that factors in expectations of future market illiquidity. In our framework, an implied liquidity premium is a function of prices, dividends, and, illiquidity costs. We find that the liquidity premium for the CRSP market portfolio is significantly priced over short horizons, but its long-horizon effect is not significant. This finding implies that unexpected illiquidity news—a main cause of the liquidity premium—is so transient that even its big variation in the first place could not build up over horizons toward a big price change. We reconcile our findings with some theoretical debate over the importance of the liquidity premium on asset pricing. In sum, market liquidity risk is basically second-order. 

JEL Classifications: C12, C32, G12.
Keywords: Asset pricing; Present value; VAR; Illiquidity; Liquidity premium; Impulse-response functions​