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Asset Markets and Endogenous Liquidity

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  • Lee Redding
  • Hamid Faruqee

Abstract

In financial markets characterized by imperfect depth, speculative trading will have transitory effects on the market price as market makers must be compensated for the risk of holding the asset. The number of people providing liquidity to a market will generally be endogenously determined by the quantity of liquidity demanded. This paper looks for evidence of endogenous liquidity provision in several international stock and bond markets. Evidence shows strong support for these speculative dynamics in the stock markets. The evidence for these dynamics is less striking with fixed‐income prices, consistent with the less speculative nature of these markets.

Suggested Citation

  • Lee Redding & Hamid Faruqee, 2001. "Asset Markets and Endogenous Liquidity," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(2), pages 196-209, May.
    • Handle: RePEc:bla:scotjp:v:48:y:2001:i:2:p:196-209
    DOI: 10.1111/1467-9485.00194
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    Cited by:

    1. Redding, Lee, 2005. "Endogenous liquidity in emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(2), pages 159-171, April.

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