IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/142.html
   My bibliography  Save this paper

Trading Volume and Asset Liquidity

Author

Listed:
  • Pagano, Marco

Abstract

The existence of a centralized market does not in itself guarantee that an asset can be readily liquidated at no loss: if the market is not deep enough, traders will experience adverse changes in the market price in response to their transactions. Market depth, however, is a function of the entry decisions of all potential traders. Each trader will therefore judge the absorptive capacity of the market on the basis of his conjectures about the behaviour of the others. This creates an externality, and as often happens in situations where externalities are at work, multiple (rational expectations) equilibria are possible. The nature of the equilibrium which results depends on the initial conjectures that each trader forms about the choices of the others. If conjectures are "pessimistic", for instance, a market may remain trapped at an inefficient equilibrium, characterized by low trading volume and low liquidity.

Suggested Citation

  • Pagano, Marco, 1986. "Trading Volume and Asset Liquidity," CEPR Discussion Papers 142, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:142
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=142
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:142. 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: (). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.