Liquidity Discovery and Asset Pricing
AbstractMost investors purchase securities knowing they will resell those securities in the future. Uncertainty about the preferences of future trading counter-parties causes randomness in future resale prices that we call liquidity risk. It is natural to suppose that investors are asymmetrically informed about liquidity risk. Through a process of liquidity discovery, trading volumes and prices reveal private information about future counter-party preferences. The liquidity discovery process leads to endogenous joint dynamics for prices, trading volume, volatility, and expected returns. In particular, market liquidity is a forward-looking predictor of future liquidity risk and, as such, is priced. Liquidity discovery provides an alternative explanation to transaction costs for the relationships between current market liquidity measures and future returns
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 525.
Date of creation: 11 Aug 2004
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Liquidity; Asset Pricing;
Other versions of this item:
- Michael Gallmeyer & Burton Hollifield & Duane Seppi, . "Liquidity Discovery and Asset Pricing," GSIA Working Papers 2004-10, Carnegie Mellon University, Tepper School of Business.
- Burton Hollifield & Michael Gallmeyer & Duane Seppi, 2004. "Liquidity Discovery and Asset Pricing," 2004 Meeting Papers 136a, Society for Economic Dynamics.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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- Carlo Favero & Marco Pagano & Ernst-Ludwig von Thadden, 2007.
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- Liu, Weimin, 2006. "A liquidity-augmented capital asset pricing model," Journal of Financial Economics, Elsevier, vol. 82(3), pages 631-671, December.
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