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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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    File URL: https://mpra.ub.uni-muenchen.de/40331/1/MPRA_paper_40331.pdf
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    References listed on IDEAS

    as
    1. DETKEN Carsten & SMETS Frank, "undated". "Asset Price Booms and Monetary Policy," EcoMod2003 330700042, EcoMod.
    2. Klaas Baks & Charles Frederick Kramer, 1999. "Global Liquidity and Asset Prices; Measurement, Implications, and Spillovers," IMF Working Papers 99/168, International Monetary Fund.
    3. Nikolaou, Kleopatra & Drehmann, Mathias, 2009. "Funding liquidity risk: definition and measurement," Working Paper Series 1024, European Central Bank.
    4. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 14(Jan).
    5. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and financial cycles," BIS Working Papers 256, Bank for International Settlements.
    6. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    liquidity; asset pricing; broker dealer; repo; error correction;

    JEL classification:

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

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