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Liquidity as Social Expertise

Listed author(s):
  • Pablo Kurlat
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    This paper proposes a theory of liquidity dynamics. Illiquidity results from asymmetric information. Observing the historical track record teaches agents how to interpret public information and helps overcome information asymmetry. There can be an illiquidity trap: too much asymmetric information leads to the breakdown of trade, which interrupts learning and perpetuates illiquidity. Liquidity falls in response to unexpected events that lead agents to question their valuation models, especially in newer markets, may be slow to recover after a crisis and is higher in periods of stability.

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    File URL: http://www.nber.org/papers/w21118.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 21118.

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    Date of creation: Apr 2015
    Handle: RePEc:nbr:nberwo:21118
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