Standard literature concludes that transaction costs only have a "second-order" effect on liquidity premia. We show that this conclusion depends crucially on the assumption of a constant investment opportunity set. In a regime-switching model in which the investment opportunity set varies over...

Many models use noise trader risk and corresponding violations of the Law of One Price to explain pricing anomalies, but include a storage technology in perfectly elastic supply or unlimited asset liability. Storage allows aggregate consumption risk to differ from exogenous fundamental risk, but...