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Market Liquidity -- Theory and Empirical Evidence

Listed author(s):
  • Dimitri Vayanos
  • Jiang Wang

In this paper we survey the theoretical and empirical literature on market liquidity. We organize both literatures around three basic questions: (a) how to measure illiquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. Using a unified model from Vayanos and Wang (2010), we survey theoretical work on six main imperfections: participation costs, transaction costs, asymmetric information, imperfect competition, funding constraints, and search---and for each imperfection we address the three basic questions within that model. We review the empirical literature through the lens of the theory, using the theory to both interpret existing results and suggest new tests and analysis.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18251.

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Date of creation: Jul 2012
Publication status: published as Market Liquidity—Theory and Empirical Evidence, in George Constantinides, Milton Harris, and Rene Stulz, eds.: Handbook of the Economics of Finance, 2013, Chapter 19, North Holland, Amsterdam. (With Jiang Wang)
Handle: RePEc:nbr:nberwo:18251
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