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Liquidity and Asset Returns under Asymmetric Information and Imperfect Competition

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  • Dimitri Vayanos

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  • Jiang Wang

Abstract

We analyze how asymmetric information and imperfect competition a®ect liquidity and asset prices. Our model has three periods: agents are identical in the ¯rst, become heterogeneous and trade in the second, and consume asset payo®s in the third. We show that asymmetric information in the second period raises ex ante expected asset returns in the first, comparing both to the case where all private signals are made public and to that where private signals are not observed. Imperfect competition can instead lower expected returns. Each imperfection can move common measures of illiquidity in opposite directions.

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File URL: http://www.lse.ac.uk/fmg/researchProgrammes/paulWoolleyCentre/workingPapers/dp708-PWC31.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp708.

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Date of creation: Jul 2012
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Handle: RePEc:fmg:fmgdps:dp708

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Web page: http://www.lse.ac.uk/fmg/

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  1. Long Chen & David A. Lesmond & Jason Wei, 2007. "Corporate Yield Spreads and Bond Liquidity," Journal of Finance, American Finance Association, vol. 62(1), pages 119-149, 02.
  2. José M. Marín & Rohit Rahi, 1996. "Information revelation and market incompleteness," Economics Working Papers 145, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Rohit Rahi, 1993. "Adverse selection and security design," Economics Working Papers 64, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 1994.
  4. Amy K. Edwards & Lawrence E. Harris & Michael S. Piwowar, 2007. "Corporate Bond Market Transaction Costs and Transparency," Journal of Finance, American Finance Association, vol. 62(3), pages 1421-1451, 06.
  5. Rohit Rahi & James Dow, 1998. "Should Speculators be Taxed?," FMG Discussion Papers dp291, Financial Markets Group.
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Cited by:
  1. Buckley, Winston & Long, Hongwei & Perera, Sandun, 2014. "A jump model for fads in asset prices under asymmetric information," European Journal of Operational Research, Elsevier, vol. 236(1), pages 200-208.
  2. James J. Choi & Li Jin & Hongjun Yan, 2013. "Informed Trading and Expected Returns," NBER Working Papers 18680, National Bureau of Economic Research, Inc.
  3. Elías Albagli, 2013. "Investment Horizons and Asset Prices under Asymmetric Information," Working Papers Central Bank of Chile 709, Central Bank of Chile.

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