The components of the illiquidity premium: An empirical analysis of US stocks 1927-2010

► We implement a time-varying decomposition of the US illiquidity premium 1927-2010. ► Estimated average annual total illiquidity premium is 1.74-2.08%. ► Illiquidity level premium is on average larger than illiquidity risk premium. ► Illiquidity risk premium increases substantially during crises and downturns. ► Largest illiquidity risk premium component is related to hedging of wealth shocks.