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Liquidity and Prices in Decentralized Markets with Almost Public Information

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  • Anton Tsoy

    (EIEF)

Abstract

This paper develops a dynamic equilibrium model of decentralized asset markets with both search delays and endogenous bargaining delays arising in the limit of almost public information about the asset quality. The model has several implications for liquidity and prices. First, conditional on the public information, the liquidity is U-shaped in the quality and assets in the middle of the quality range may not be traded at all. Second, search and bargaining frictions have opposite effects on the market liquidity showing that transparency, while welfare improving, may also hurt the market liquidity. Third, the substitutability of different asset classes leads to flights-to-liquidity during periods of market uncertainty and reveals adverse effects of gradual transparency policies. Finally, the paper derives the effect of asset liquidity, market liquidity and market tightness on asset prices.

Suggested Citation

  • Anton Tsoy, 2016. "Liquidity and Prices in Decentralized Markets with Almost Public Information," 2016 Meeting Papers 8, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:8
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