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The Role of Trading Frictions in Real Asset Markets

  • Alessandro Gavazza

This paper investigates how trading frictions vary with the thickness of the asset market by examining patterns of asset allocations and prices in commercial aircraft markets. The empirical analysis indicates that assets with a thinner market are less liquid -- i.e., more difficult to sell. Thus, firms hold on longer to them amid profitability shocks. Hence, when markets for assets are thin, firms' average productivity and capacity utilization are lower, and the dispersions of productivity and of capacity utilization are higher. In turn, prices of assets with a thin market are lower and have a higher dispersion. (JEL A12, L11, L93)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 4 (June)
Pages: 1106-43

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:4:p:1106-43
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  18. Efraim Benmelech & Nittai K. Bergman, 2008. "Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines," NBER Working Papers 14059, National Bureau of Economic Research, Inc.
  19. Marcelo L. Veracierto, 2002. "Plant-Level Irreversible Investment and Equilibrium Business Cycles," American Economic Review, American Economic Association, vol. 92(1), pages 181-197, March.
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  22. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  23. Kim, Chyhe Esther, 1998. "The Effects of Asset Liquidity: Evidence from the Contract Drilling Industry," Journal of Financial Intermediation, Elsevier, vol. 7(2), pages 151-176, April.
  24. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  25. Natarajan Balasubramanian & Jagadeesh Sivadasan, 2009. "Capital Resalability, Productivity Dispersion, and Market Structure," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 547-557, August.
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  27. Gavazza, Alessandro, 2010. "Asset liquidity and financial contracts: Evidence from aircraft leases," Journal of Financial Economics, Elsevier, vol. 95(1), pages 62-84, January.
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