IDEAS home Printed from https://ideas.repec.org/p/red/sed016/1438.html
   My bibliography  Save this paper

Adverse Selection, Search Frictions and Liquidity in Financial Markets

Author

Listed:
  • Venky Venkateswaran

    (New York University)

  • Ariel Zetlin-Jones

    (Carnegie Mellon University)

  • Ali Shourideh

    (University of Pennsylavnia)

  • Benjamin Lester

    (Federal Reserve Bank of Philadelphia)

Abstract

We study a dynamic financial market where informed traders meet and trade with marketmakers in bilateral interactions. In such an environment, market liquidity, summarized by the bid-ask spread, is determined jointly by the two primitive forces, namely search frictions (as in Duffie et. al., 2005) and asymmetric information (in the spirit of Glosten and Milgrom, 1985). We show that their interaction leads to novel and surprising implications, both positive and normative. Reducing trading frictions, for example, exacerbates the effects of asymmetric information, which can lead to lower liquidity and welfare. More transparency increases the distortions from market-power and also has negative liquidity/welfare consequences. These results point to the value of a unified framework with both frictions for evaluating the effects of policies.

Suggested Citation

  • Venky Venkateswaran & Ariel Zetlin-Jones & Ali Shourideh & Benjamin Lester, 2016. "Adverse Selection, Search Frictions and Liquidity in Financial Markets," 2016 Meeting Papers 1438, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1438
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2016/paper_1438.pdf
    Download Restriction: no
    ---><---

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed016:1438. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.