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Liquidity and asset prices: a VECM approach

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  • Ács, Attila

Abstract

The recent financial and economic crisis highlighted the importance to better understand the relationship between liquidity developments and asset price movements. Central banks with focus on inflation targeting allowed asset price inflation, following burst, with its devastating consequences for the financial system and real economy. Equilibrium price should emanate from fundamentals. However liquidity conditions are part of fundamental variables and should be taken into consideration as explanatory variables in the process of asset pricing. Furthermore in many cases assets serve as collateral in refinancing which means that refinancing conditions influence values of pledged assets.

Suggested Citation

  • Ács, Attila, 2012. "Liquidity and asset prices: a VECM approach," MPRA Paper 40331, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:40331
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    References listed on IDEAS

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    More about this item

    Keywords

    liquidity; asset pricing; broker dealer; repo; error correction;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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    This paper has been announced in the following NEP Reports:

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