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Liquidity and asset prices: a VECM approach

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  • Ács, Attila
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    Abstract

    The recent financial and economic crisis highlighted the importance to better understand the relationship between liquidity developments and asset price movements. Central banks with focus on inflation targeting allowed asset price inflation, following burst, with its devastating consequences for the financial system and real economy. Equilibrium price should emanate from fundamentals. However liquidity conditions are part of fundamental variables and should be taken into consideration as explanatory variables in the process of asset pricing. Furthermore in many cases assets serve as collateral in refinancing which means that refinancing conditions influence values of pledged assets.

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    File URL: http://mpra.ub.uni-muenchen.de/40331/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40331.

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    Date of creation: 2012
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    Handle: RePEc:pra:mprapa:40331

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    Keywords: liquidity; asset pricing; broker dealer; repo; error correction;

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    1. Mathias Drehmann & Kleopatra Nikolaou, 2010. "Funding liquidity risk: definition and measurement," BIS Working Papers 316, Bank for International Settlements.
    2. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 14(Jan).
    3. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
    4. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and financial cycles," BIS Working Papers 256, Bank for International Settlements.
    5. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series, European Central Bank 0364, European Central Bank.
    6. Klaas Baks & Charles Frederick Kramer, 1999. "Global Liquidity and Asset Prices," IMF Working Papers 99/168, International Monetary Fund.
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