Valuation in Over-the-Counter Markets
We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then 'recover' over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.
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- Amihud, Yakov & Mendelson, Haim & Pedersen, Lasse Heje, 2006.
"Liquidity and Asset Prices,"
Foundations and Trends(R) in Finance,
now publishers, vol. 1(4), pages 269-364, February.
- Viral V. Acharya & Lasse Heje Pedersen, 2004.
"Asset Pricing with Liquidity Risk,"
NBER Working Papers
10814, National Bureau of Economic Research, Inc.
- Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
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