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Learning from Prices, Liquidity Spillovers, and Market Segmentation

Author

Listed:
  • Giovanni Cespa

    () (Cass Business School, CSEF, and CEPR)

  • Thierry Focault

    (HEC, School of Management, Paris, GREGHEC, and CEPR)

Abstract

We describe a new mechanism that explains the transmission of liquidity shocks from one security to another (“liquidity spillovers”). Dealers use prices of other securities as a source of information. As prices of less liquid securities convey less precise information, a drop in liquidity for one security raises the uncertainty for dealers in other securities, thereby affecting their liquidity. The direction of liquidity spillovers is positive if the fraction of dealers with price information on other securities is high enough. Otherwise liquidity spillovers can be negative. For some parameters, the value of price information increases with the number of dealers obtaining this information. In this case, related securities can appear segmented, even if the cost of price information is small.

Suggested Citation

  • Giovanni Cespa & Thierry Focault, 2011. "Learning from Prices, Liquidity Spillovers, and Market Segmentation," CSEF Working Papers 284, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:284
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    File URL: http://www.csef.it/WP/wp284.pdf
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    Citations

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    Cited by:

    1. Capelle-Blancard, Gunther & Havrylchyk, Olena, 2016. "The impact of the French securities transaction tax on market liquidity and volatility," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 166-178.
    2. repec:eee:riibaf:v:41:y:2017:i:c:p:461-479 is not listed on IDEAS
    3. Mila Getmansky & Ravi Jagannathan & Loriana Pelizzon & Ernst Schaumburg & Darya Yuferova, 2017. "Stock Price Crashes: Role of Capital Constrained Traders," NBER Working Papers 24098, National Bureau of Economic Research, Inc.
    4. Bellia, Mario & Pelizzon, Loriana & Subrahmanyam, Marti & Uno, Jun & Yuferova, Darya, 2017. "Coming early to the party," SAFE Working Paper Series 182, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    5. Liyan Yang & Itay Goldstein, 2012. "Information Diversity and Market Efficiency Spirals," 2012 Meeting Papers 349, Society for Economic Dynamics.
    6. Smimou, K. & Khallouli, W., 2016. "On the intensity of liquidity spillovers in the Eurozone," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 388-405.

    More about this item

    Keywords

    Liquidity spillovers; Liquidity Risk; Contagion; Value of price information; Transparency; Colocation;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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