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Liquid Capital and Market Liquidity

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Author Info
TimothyC. Johnson
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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2009.02293.x
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Publisher 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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This page was last updated on 2009-12-8.

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