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Liquidity and private information in asset markets: To signal or not to signal

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  • Wang, Zijian

Abstract

This paper examines how multidimensional private information by asset sellers affects market equilibrium. I find that when asset quality is the only source of private information, sellers with high-quality assets signal their quality to buyers through partial retention of assets if and only if their liquidity holdings are large. However, when sellers' valuations of liquid assets are also private information, some sellers with high-quality assets signal their quality even if their liquidity holdings are small. The model is extended to study the implications for discount window lending and government asset purchases.

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  • Wang, Zijian, 2020. "Liquidity and private information in asset markets: To signal or not to signal," Journal of Economic Theory, Elsevier, vol. 190(C).
    • Handle: RePEc:eee:jetheo:v:190:y:2020:i:c:s0022053120301150
    DOI: 10.1016/j.jet.2020.105122
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    More about this item

    Keywords

    Financial markets; Private information; Market efficiency; Monetary policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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