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Recognizability and Liquidity of Assets

Author

Listed:
  • Young Sik Kim

    (Seoul National University)

  • Manjong Lee

    (Korea University)

Abstract

The recognizability of assets is embedded into a standard search model to determine liquidity returns. Assuming that money is universally recognizable but bond is not, two types of trades arise–one where both money and bond are accepted and the other where only money is accepted as a medium of exchange–depending on a seller’s strategy of accepting or rejecting the bond of unrecognized quality and a buyer’s strategy of carrying the counterfeit bond. Equilibrium restrictions imply that the liquidity differentials between money and bond tend to increase with the recognizability problem. Money commands higher liquidity than bond by providing additional liquidity service when sellers reject the bond of unrecognized quality as well as when they recognize counterfeit bond. The coexistence of money and bond requires a higher full (liquidity augmented) return for bond than money, implying a positive liquidity premium.

Suggested Citation

  • Young Sik Kim & Manjong Lee, 2012. "Recognizability and Liquidity of Assets," Korean Economic Review, Korean Economic Association, vol. 28, pages 241-259.
    • Handle: RePEc:kea:keappr:ker-20121231-28-2-06
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    References listed on IDEAS

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    Cited by:

    1. Ricardo Lagos, 2008. "The Research Agenda: Ricardo Lagos on Liquidity and the Search Theory of Money," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 10(1), November.
    2. Guillaume Rocheteau, 2009. "Information and liquidity: a discussion," Working Papers (Old Series) 0902, Federal Reserve Bank of Cleveland.
    3. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Papers (Old Series) 0901, Federal Reserve Bank of Cleveland.

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    More about this item

    Keywords

    Asset Pricing; Coexistence; Liquidity; Recognizability;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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