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Liquidity and Asset Prices: A Unified Framework

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  • Dimitri Vayanos
  • Jiang Wang

Abstract

We examine how liquidity and asset prices are affected by the following market imperfections: asymmetric information, participation costs, transaction costs, leverage constraints, non-competitive behavior and search. Our model has three periods: agents are identical in the first, become heterogeneous and trade in the second, and consume asset payoffs in the third. We examine how imperfections in the second period affect different measures of illiquidity, as well as asset prices in the first period. Besides nesting multiple imperfections in a single model, we derive new results on the effects of each imperfection. Our results imply, in particular, that imperfections do not always raise expected returns, and can influence common measures of illiquidity in opposite directions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15215.

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Date of creation: Aug 2009
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Publication status: published as Liquidity and Asset Prices under Asymmetric Information and Imperfect Competition, Review of Financial Studies, 2012, 25, 1339-1365. (With Jiang Wang) Previously circulated under the title: Liquidity and Asset Prices: A Unified Framework.
Handle: RePEc:nbr:nberwo:15215

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Cited by:
  1. Philippe Bacchetta & Cedric Tille & Eric van Wincoop, 2010. "Self-Fulfilling Risk Panics," Working Papers 282010, Hong Kong Institute for Monetary Research.
  2. Eric van Wincoop & Cedric Tille & Philippe Bacchetta, 2010. "On the Dynamics of Leverage, Liquidity, and Risk," 2010 Meeting Papers, Society for Economic Dynamics 393, Society for Economic Dynamics.

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