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Equilibrium valuation of illiquid assets

Author

Listed:
  • John Krainer

    (Economic Research, Federal Reserve Bank of San Francisco, San Francisco, CA 94105, USA)

  • Stephen F. LeRoy

    (Economics Department, University of California at Santa Barbara, Santa Barbara, CA 93106, USA)

Abstract

We develop an equilibrium model of illiquid asset valuation based on search and matching. We propose several measures of illiquidity and show how these measures behave. We also show that the equilibrium amount of search may be less than, equal to or greater than the amount of search that is socially optimal. Finally, we show that excess returns on illiquid assets are fair games if returns are defined to include the appropriate shadow prices.

Suggested Citation

  • John Krainer & Stephen F. LeRoy, 2002. "Equilibrium valuation of illiquid assets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 19(2), pages 223-242.
    • Handle: RePEc:spr:joecth:v:19:y:2002:i:2:p:223-242
    Note: Received: June 25, 2000; revised version: October 24, 2000
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    Citations

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    Cited by:

    1. Duffie, Darrell & Sun, Yeneng, 2012. "The exact law of large numbers for independent random matching," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1105-1139.
    2. John Krainer & Mark M. Spiegel & Nobuyoshi Yamori, 2005. "Asset price declines and real estate market illiquidity: evidence from Japanese land values," Working Paper Series 2004-16, Federal Reserve Bank of San Francisco.
    3. Yunyi Zhang & Huaying Gu, 2020. "An Improved Approach for Constructing the Real Estate Price Index with Bargaining Effect," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(5), pages 1-1, May.
    4. François Ortalo-Magné & Sven Rady, 2006. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints ," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(2), pages 459-485.
    5. Korth, Christian & Napel, Stefan, 2009. "Fairness, price stickiness, and history dependence in decentralized trade," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 502-514, August.
    6. John Krainer, 1999. "Real estate liquidity," Economic Review, Federal Reserve Bank of San Francisco, pages 14-26.

    More about this item

    Keywords

    Asset pricing; Housing prices; Illiquidity; Search.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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