Market Liquidity and Asset Prices under Costly Participation
In this paper, we develop an equilibrium model for market liquidity and its impact on asset prices when constant participation in the market is costly. We show that, even when investors trading needs are perfectly matched, costly participation prevents them from synchronize their trades, which gives rise to the need for liquidity in the market. Fluctuations in liquidity needs cause asset prices to deviate from the fundamentals. Moreover, these price deviations tend to have large magnitudes in absence of any aggregate shocks, resembling what can be called liquidity crashes, and lead to fat tails in return distributions. We also show that the lack of coordination among investors in the demand and the supply of liquidity generates negative externalities, and the loss in social welfare can out-weight the savings on participation costs.
Jennifer Huang Jiang Wang
Department of Finance, B6600, McCombs School of Business, The University of Texas at Austin, Austin, MIT Sloan School of Management, E52-456, 50 Memorial Drive, Cambridge, MA 02142-1347, CCFR and NBER
国际会议
昆明
英文
2005-07-05（万方平台首次上网日期，不代表论文的发表时间）