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Liquid Capital and Market Liquidity

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  • Timothy C. Johnson
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    Abstract

    This article considers how the supply of liquid capital affects the liquidity of asset markets. The article views the former notion as a technological property of real investments and the latter as an endogenous property of financial market equilibrium, and describes a channel by which the two are linked. When agents hold more wealth in technologically liquid investments, a marginal adjustment to portfolio holdings alters discount rates less, causing a smaller price impact. Thus, even without intermediaries or frictions, the stock of transformable capital may be a crucial determinant of the resilience of financial markets. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.

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    Bibliographic Info

    Article provided by Royal Economic Society in its journal The Economic Journal.

    Volume (Year): 119 (2009)
    Issue (Month): 540 (October)
    Pages: 1374-1404

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    Handle: RePEc:ecj:econjl:v:119:y:2009:i:540:p:1374-1404

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