Liquidity and Market Structure
Market liquidity is modeled as being determined by the demand and supply of immediacy. Exogenous liquidity events coupled with the risk of delayed trade create a demand for immediacy. Market makers supply immediacy by their continuous presence. and willingness to bear risk during the time period between the arrival of final buyers and sellers. In the long run the number of market makers adjusts to equate the supply and demand for immediacy. This determine the equilibrium level of liquidity in the market. The lower is the autocorrelation in rates of return, the higher is the equilibrium level of liquidity.
|Date of creation:||Jul 1988|
|Date of revision:|
|Publication status:||published as Journal of Finance, Vol. XLIII, No. 3, (July 1988), pp. 617-637.|
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"Bid, ask and transaction prices in a specialist market with heterogeneously informed traders,"
Journal of Financial Economics,
Elsevier, vol. 14(1), pages 71-100, March.
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- Sanford J. Grossman, 1987.
"An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies,"
NBER Working Papers
2357, National Bureau of Economic Research, Inc.
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- Cohen, Kalman J, et al, 1981. "Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 287-305, April.
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