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Theories of liquidity

Vayanos, Dimitri (2012) Theories of liquidity. Foundations and Trends in Finance, 6 (4). pp. 221-317. ISSN 1567-2395

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We survey the theoretical literature on market liquidity. The literature traces illiquidity, i.e., the lack of liquidity, to underlying market imperfections. We consider six main imperfections: participation costs, transaction costs, asymmetric information, imperfect competition, funding constraints, and search. We address three questions in the context of each imperfection: (a) how to measure illiquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. We nest all six imperfections within a common, unified model, and use that model to organize the literature.

Item Type: Article
Official URL:
Additional Information: © 2012 The Authors
Library of Congress subject classification: H Social Sciences > HG Finance
Journal of Economic Literature Classification System: G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 30 Nov 2012 13:13

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