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Liquidity and Asset Prices: A Unified Framework

Author

Listed:
  • Dimitri Vayanos

  • Jiang Wang

Abstract

We examine how liquidity and asset prices are affected by the following market imperfections: asymmetric information, participation costs, transaction costs, leverage constraints, non-competitive behavior and search. Our model has three periods: agents are identical in the first, become heterogeneous and trade in the second, and consume asset payoffs in the third. We examine how imperfections in the second period affect different measures of illiquidity, as well as asset prices in the first period. Besides nesting multiple imperfections in a single model, we derive new results on the effects of each imperfection. Our results imply, in particular, that imperfections do not always raise expected returns, and can influence common measures of illiquidity in opposite directions.

Suggested Citation

  • Dimitri Vayanos & Jiang Wang, 2009. "Liquidity and Asset Prices: A Unified Framework," FMG Discussion Papers dp639, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp639
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    Cited by:

    1. Giovanni Tira & Tommaso Gabrieli & Gianluca Marcato, 2011. "Liquidity Black Hole and Optimal Behavioral," ERES eres2011_116, European Real Estate Society (ERES).
    2. Philippe Bacchetta & Cédric Tille & Eric van Wincoop, 2012. "Self-Fulfilling Risk Panics," American Economic Review, American Economic Association, vol. 102(7), pages 3674-3700, December.
    3. Jinho Cha & Long Pham & Thi Le Hoa Vo & Jaeyoung Cho & Jaejin Lee, 2025. "Inverse Portfolio Optimization with Synthetic Investor Data: Recovering Risk Preferences under Uncertainty," Papers 2510.06986, arXiv.org, revised Oct 2025.
    4. Russ, David, 2022. "Multidimensional noise and non-fundamental information diversity," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    5. Ingomar Krohn & Philippe Mueller & Paul Whelan, 2024. "Foreign Exchange Fixings and Returns around the Clock," Journal of Finance, American Finance Association, vol. 79(1), pages 541-578, February.
    6. Eric van Wincoop & Cedric Tille & Philippe Bacchetta, 2010. "On the Dynamics of Leverage, Liquidity, and Risk," 2010 Meeting Papers 393, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J1 - Labor and Demographic Economics - - Demographic Economics

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