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Liquidity premia in dynamic bargaining markets

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Author Info
Weill, Pierre-Olivier

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Abstract

This paper develops a search-theoretic model of the cross-sectional distribution of asset returns, abstracting from risk premia and focusing exclusively on liquidity. In contrast with much of the transaction-cost literature, it is not assumed that different assets carry different exogenously specified trading costs. Instead, different expected returns, due to liquidity, are explained by the cross-sectional variation in tradeable shares. The qualitative predictions of the model are consistent with much of the empirical evidence.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 140 (2008)
Issue (Month): 1 (May)
Pages: 66-96
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Handle: RePEc:eee:jetheo:v:140:y:2008:i:1:p:66-96

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Web page: http://www.elsevier.com/locate/inca/622869

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Acharya, Viral V & Pedersen, Lasse Heje, 2003. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 3749, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June. [Downloadable!] (restricted)
    Other versions:
  3. Wallace, Neil, 2000. "A model of the liquidity structure based on asset indivisibility," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 55-68, February. [Downloadable!] (restricted)
  4. Connor, Gregory & Korajczyk, Robert A., 1988. "Risk and return in an equilibrium APT : Application of a new test methodology," Journal of Financial Economics, Elsevier, vol. 21(2), pages 255-289, September. [Downloadable!] (restricted)
  5. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July. [Downloadable!] (restricted)
  6. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July. [Downloadable!] (restricted)
  7. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October. [Downloadable!] (restricted)
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  8. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June. [Downloadable!] (restricted)
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  9. Willem H. Buiter, 1984. "Saddlepoint Problems in Contifuous Time Rational Expectations Models: A General Method and Some Macroeconomic Ehamples," NBER Technical Working Papers 0020, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Huang, Ming, 2003. "Liquidity shocks and equilibrium liquidity premia," Journal of Economic Theory, Elsevier, vol. 109(1), pages 104-129, March. [Downloadable!] (restricted)
  11. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July. [Downloadable!] (restricted)
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  12. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December. [Downloadable!] (restricted)
  13. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August. [Downloadable!] (restricted)
  14. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August. [Downloadable!] (restricted)
  15. Lasse Pedersen & Darrell Duffie & Nicolae Garleanu, 2004. "Valuation in Dynamic Bargaining Markets," Econometric Society 2004 North American Winter Meetings 649, Econometric Society.
  16. Shing-yang Hu, 1997. "Trading Turnover and Expected Stock Returns: The Trading Frequency Hypothesis and Evidence from the Tokyo Stock Exchange," Finance 9702001, EconWPA. [Downloadable!]
  17. Petersen, Mitchell A. & Fialkowski, David, 1994. "Posted versus effective spreads *1: Good prices or bad quotes?," Journal of Financial Economics, Elsevier, vol. 35(3), pages 269-292, June. [Downloadable!] (restricted)
  18. Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(1), pages 1-58.
  19. Eleswarapu, Venkat R, 1997. " Cost of Transacting and Expected Returns in the Nasdaq Market," Journal of Finance, American Finance Association, vol. 52(5), pages 2113-27, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jianping Mei & Jose Scheinkman & Wei Xiong, 2005. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," NBER Working Papers 11362, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Jeremy Large, 2006. "A Market-Clearing Role for Inefficiency on a Limit Order Book," Economics Papers 2006-W08, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
    Other versions:
  3. Michael J. Barclay & Terrence Hendershott & Kenneth Kotz, 2006. "Automation versus Intermediation: Evidence from Treasuries Going Off the Run," Journal of Finance, American Finance Association, vol. 61(5), pages 2395-2414, October. [Downloadable!] (restricted)
  4. Shoko Morimoto, 2009. "Asset markets can achieve efficiency in the directed search framework," Discussion Papers in Economics and Business 09-33, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP). [Downloadable!]
  5. Darrell Duffie & Yeneng Sun, 2004. "The Exact Law of Large Numbers for Independent Random Matching," Levine's Bibliography 122247000000000328, UCLA Department of Economics. [Downloadable!]
  6. Ricardo Lagos & Guillaume Rocheteau, 2006. "Search in asset markets," Working Paper 0607, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  7. Jianping Mei & Jose Scheinkman & Wei Xiong, 2005. "Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia," Levine's Bibliography 122247000000000867, UCLA Department of Economics. [Downloadable!]
  8. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2005. "Over-the-Counter Markets," Econometrica, Econometric Society, vol. 73(6), pages 1815-1847, November. [Downloadable!] (restricted)
  9. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 111-142. [Downloadable!]
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