Liquidity and asset prices: a united framework

Vayanos, Dimitri ORCID: 0000-0002-0944-4914 and Wang, Jiang (2009) Liquidity and asset prices: a united framework. Discussion paper (639). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We examine how liquidity and asset prices are affected by the following market imperfections: asymmetric information, participation costs, transaction costs, leverage constraints, non-competitive behavior and search. Our model has three periods: agents are identical in the first, become heterogeneous and trade in the second, and consume asset payoffs in the third. We examine how imperfections in the second period affect different measures of illiquidity, as well as asset prices in the first period. Besides nesting multiple imperfections in a single model, we derive new results on the effects of each imperfection. Our results imply, in particular, that imperfections do not always raise expected returns, and can influence common measures of illiquidity in opposite directions.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://fmg.lse.ac.uk
Additional Information:	© 2009 The authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
Date Deposited:	09 Sep 2010 13:37
Last Modified:	13 Sep 2024 20:12
URI:	http://eprints.lse.ac.uk/id/eprint/29303

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