Market liquidity - theory and empirical evidence

Vayanos, Dimitri ORCID: 0000-0002-0944-4914 and Wang, Jiang (2012) Market liquidity - theory and empirical evidence. Financial Markets Group Discussion Papers (709). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

In this paper we survey the theoretical and empirical literature on market liquidity. We organize both literatures around three basic questions: (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. Using a unified model from Vayanos and Wang (2010), we survey theoretical work on six main imperfections: participation costs, transaction costs, asymmetric information, imperfect competition, funding constraints, and search-and for each imperfection we address the three basic questions within that model. We review the empirical literature through the lens of the theory, using the theory to both interpret existing results and suggest new tests and analysis.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2012 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D4 - Market Structure and Pricing > D42 - Monopoly D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief G - Financial Economics > G0 - General > G00 - General G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Date Deposited:	29 Jun 2023 08:03
Last Modified:	11 Dec 2024 19:46
URI:	http://eprints.lse.ac.uk/id/eprint/119044

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