IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Liquidity Discovery and Asset Pricing

  • Michael Gallmeyer
  • Burton Hollifield
  • Duane Seppi

Asset prices are risky, in part, because of uncertainty about the preferences of potential counterparties and the terms-of-trade at which they will be willing to provide liquidity in the future. We call such randomness liquidity risk. We argue that liquidity risk is an important source of asymmetric information in addition to private information about future cash flows. We model the endogenous dynamics of liquidity risk, the risk premisum for bearing liquidity risk, and the role of market trading in the liquidity discovery process through which investors learn about their counterparties' preferences and their future demands for securities. We show that market liquidity is a forward-looking predictor of future risk and, as such, is prices. Our model also provides rational explanations for "prices support levels" and "flights to quality."

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2004-10.

in new window

Date of creation:
Date of revision:
Handle: RePEc:cmu:gsiawp:-162320987
Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page:

Order Information: Web:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cmu:gsiawp:-162320987. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Steve Spear)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.