My research is in the area of empirical asset pricing, and I have a particular interest in the effects of liquidity, especially in fixed income and money markets. I investigate the determinants of price movements and investors' trades. A better understanding of the drivers of asset prices can help to inform the decisions of policymakers and investors.
  • For instance, I have found that levered investors' demand for very liquid securities is an important contributor to the limits to arbitrage in fixed income markets, allowing pricing anomalies to arise and persist. Investors with relatively short trading horizons also exacerbate relative price differentials between comparable securities.
  • The contribution of market liquidity to euro-area risk spreads exceeded that of default risk by 1.5 to 3 times, during the 2007-2009 financial crisis. But, credit effects on interest rate spreads grew as some European governments realized particularly large debt burdens and the debt crisis took hold.
    • A large driver of the liquidity component in interest rate spreads in the crisis came from liquidity risk premia. These premia reflect the risk that an asset's liquidity could worsen at a particularly inopportune future time.
  • In testing for risk premia, valuable information from the cross-section of individual assets, beyond that found by using portfolios of assets, can increase the precision of estimates.

Research Papers and Some Illustrated Results



The U.S. Treasury yield curve split into two separate curves (liquid versus illiquid securities) in 2008-2009.

Market liquidity differentials between otherwise comparable Treasury securities can have a large effect on the relative prices of these securities. Net funding costs explain only a small fraction of the price divergence when interest rates are low.

Visualizing limits to arbitrage over various holding periods shows that the precise timing of entering into an arbitrage matters more (less) for an investor with a relatively short (long) horizon.


In the 2007-2009 crisis, euro-area bond returns showed a marked time-variation in sensitivity to market liquidity and credit shocks.
  • In 2008, bond returns showed a large increase in response to liquidity shocks, but not in response to credit shocks.
  • In 2009, returns responded dramatically to both liquidity and credit.
The yield spread between two securities with identical cash flows but different prices is a tradable proxy for market liquidity that can be used to hedge against changes in market liquidity or to interpret changes in risk spreads.

K-Measure of Market Liquidity*
Updated through: July 18, 2015


*Schwarz, Krista (2015) "Mind the Gap: Disentangling Credit and Liquidity in Risk Spreads." Working Paper, University of Pennsylvania, Wharton School of Business.


Standard asset pricing models (such as CAPM or Fama-French) give the most precise measures of risk premia if they are estimated by using the prices of individual assets rather than portfolios of assets (the larger the portfolio the more estimation efficiency is lost).



Speculator trades reveal private information in equity futures markets. Hedgers' trades do not.