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Liquid Capital and Market Liquidity

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  • Timothy C. 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.

Suggested Citation

  • Timothy C. Johnson, 2009. "Liquid Capital and Market Liquidity," Economic Journal, Royal Economic Society, vol. 119(540), pages 1374-1404, October.
    • Handle: RePEc:wly:econjl:v:119:y:2009:i:540:p:1374-1404
    DOI: 10.1111/j.1468-0297.2009.02293.x
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