Question: Explain the Amihud and Mendelson (1986) arguments for why illiquidity impacts on asset prices. How is illiquidity represented in the Amihud and Mendelson (1986) framework?

Explain the Amihud and Mendelson (1986) arguments for why illiquidity impacts on asset prices. How is illiquidity represented in the Amihud and Mendelson (1986) framework? Acharya and Pedersen (2005) argue that liquidity risk is priced. How do the arguments of Acharya and Pedersen (2005) differ from Amihud and Mendelson (1986)? Please restrict your response to a maximum of 500 words. Use your own words.

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