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Information, Liquidity and Asset Prices

Author

Listed:
  • Benjamin Lester

    (Department of Economics, University of Western Ontario)

  • Andrew Postlewaite

    (Department of Economics, University of Pennsylvania)

  • Randall Wright

    (Department of Economics, University of Pennsylvania)

Abstract

We study economies with multiple assets that are valued both for their return and liquidity. Exchange occurs in decentralized markets with frictions making a medium of exchange essential. Some assets are better suited for this role because they are more liquid - more likely to be accepted in trade - even if they have a lower return. The reason assets are more or less likely to be accepted is modeled using informational frictions, or recognizability. While everyone understands e.g. what currency is and what it is worth, some might be less sure about other claims. In our model, agents who do not recognize assets do not accept them in trade. Recognizability is endogenized by letting agents invest in information, potentially generating multiple equilibria with different liquidity. We discuss implications for asset pricing and for monetary policy. In particular, we show explicitly that what may look like a cash-in-advance constraint is not invariant to policy interventions or other changes in the economic environment

Suggested Citation

  • Benjamin Lester & Andrew Postlewaite & Randall Wright, 2008. "Information, Liquidity and Asset Prices," PIER Working Paper Archive 08-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:08-039
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    References listed on IDEAS

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    Cited by:

    1. Geromichalos, Athanasios & Simonovska, Ina, 2014. "Asset liquidity and international portfolio choice," Journal of Economic Theory, Elsevier, vol. 151(C), pages 342-380.
    2. Rocheteau, Guillaume & Wright, Randall, 2013. "Liquidity and asset-market dynamics," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 275-294.
    3. Hu, Tai-Wei & Rocheteau, Guillaume, 2013. "On the coexistence of money and higher-return assets and its social role," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2520-2560.
    4. Mei Dong, 2009. "Money and Costly Credit," 2009 Meeting Papers 404, Society for Economic Dynamics.
    5. Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-398, February.
    6. Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2012. "Liquidity and the Threat of Fraudulent Assets," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 000.
    7. Yiting Li, 2011. "Currency and Checking Deposits as Means of Payment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 403-417, April.
    8. Pere Gomis‐Porqueras & Timothy Kam & Junsang Lee, 2013. "Money, Capital, And Exchange Rate Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(1), pages 329-353, February.
    9. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, Sellers and Middlemen: Variations on Search-Theoretic Themes," NBER Working Papers 17511, National Bureau of Economic Research, Inc.
    10. Ricardo Lagos, 2008. "The Research Agenda: Ricardo Lagos on Liquidity and the Search Theory of Money," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 10(1), November.
    11. Guillaume Rocheteau, 2009. "Information and liquidity: a discussion," Working Papers (Old Series) 0902, Federal Reserve Bank of Cleveland.
    12. Athanasios Geromichalos & Lucas Herrenbrueck, 2016. "Monetary Policy, Asset Prices, and Liquidity in Over‐the‐Counter Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 35-79, February.
    13. Young Sik Kim & Manjong Lee, 2012. "Recognizability and Liquidity of Assets," Korean Economic Review, Korean Economic Association, vol. 28, pages 241-259.
    14. Parag Waknis, 2011. "Endogenous Monetary Policy: A Leviathan Central Bank in a Lagos-Wright Economy," Working papers 2011-20, University of Connecticut, Department of Economics.
    15. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, sellers and middlemen: variations in search theory," Working Papers 691, Federal Reserve Bank of Minneapolis.

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    More about this item

    Keywords

    Money; Asset Pricing; Liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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