IDEAS home Printed from https://ideas.repec.org/a/ucp/jnlbus/v77y2004i4p895-908.html
   My bibliography  Save this article

Is Liquidity Self-Fulfilling?

Author

Listed:
  • James Dow

    (London Business School)

Abstract

A security market where the relative incidence of informed and uninformed trading determines liquidity may have more than one equilibrium. Equilibrium with high liquidity has a low bid-ask spread. This increases participation by traders who want to hedge risk exposure, as opposed to trading on private information, and justifies the small price impact of trades. Equilibrium with low liquidity has a high bid-ask spread. This deters some hedgers, increasing the relative incidence of informed trading, which justifies the larger spread. This analysis casts doubt on the relevance of comparative statics results in the existing literature relying on exogenous liquidity traders.

Suggested Citation

  • James Dow, 2004. "Is Liquidity Self-Fulfilling?," The Journal of Business, University of Chicago Press, vol. 77(4), pages 895-908, October.
    • Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:4:p:895-908
    DOI: 10.1086/422628
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/422628
    File Function: main text
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: https://libkey.io/10.1086/422628?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Afonso, Gara, 2011. "Liquidity and congestion," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 324-360, July.
    2. Gara Minguez Afonso, 2008. "Liquidity and Congestion," 2008 Meeting Papers 926, Society for Economic Dynamics.
    3. Ozsoylev, Han N. & Takayama, Shino, 2010. "Price, trade size, and information revelation in multi-period securities markets," Journal of Financial Markets, Elsevier, vol. 13(1), pages 49-76, February.
    4. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    5. Carvalho, Carlos & Klagge, Nicholas & Moench, Emanuel, 2011. "The persistent effects of a false news shock," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 597-615, September.
    6. Gabor Pinter & Chaojun Wang & Junyuan Zou, 2024. "Size Discount and Size Penalty: Trading Costs in Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 37(7), pages 2156-2190.
    7. David Musto & Greg Nini & Krista Schwarz, 2018. "Notes on Bonds: Illiquidity Feedback During the Financial Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 31(8), pages 2983-3018.
    8. Strobl, Günter, 2022. "A theory of procyclical market liquidity," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    9. Bruno Biais & Christophe Bisière & Sébastien Pouget, 2014. "Equilibrium Discovery and Preopening Mechanisms in an Experimental Market," Management Science, INFORMS, vol. 60(3), pages 753-769, March.
    10. Stephen Morris & Hyun Song Shin, 2010. "Contagious Adverse Selection - Revised November, 2010," Working Papers 1282, Princeton University, Department of Economics, Econometric Research Program..
    11. Krista Schwarz, 2019. "Mind the Gap: Disentangling Credit and Liquidity in Risk Spreads," Review of Finance, European Finance Association, vol. 23(3), pages 557-597.
    12. Glebkin, Sergei & Kuong, John Chi-Fong, 2023. "When large traders create noise," Journal of Financial Economics, Elsevier, vol. 150(2).
    13. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2013. "Liquidity Cycles and Make/Take Fees in Electronic Markets," Journal of Finance, American Finance Association, vol. 68(1), pages 299-341, February.
    14. Chen-Yu Chen & Jian-Hsin Chou & Hung-Gay Fung & Yiuman Tse, 2017. "Setting the futures margin with price limits: the case for single-stock futures," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 219-237, January.
    15. Bond, Philip & Dow, James, 2021. "Failing to forecast rare events," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1001-1016.
    16. Farhi, Emmanuel & Tirole, Jean, 2015. "Liquid bundles," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 634-655.
    17. Zheng, Zhigang & Tang, Ke & Liu, Yaodong & Guo, Jie Michael, 2021. "Gender and herding," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 379-400.
    18. Stephen Morris & Hyun Song Shin, 2012. "Contagious Adverse Selection," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 1-21, January.
    19. Christophe Chamley, 2005. "Complementarities in Information Acquisition with Short-Term Trades," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-156, Boston University - Department of Economics.
    20. Martin Walther & Marco Bade, 2020. "Observational learning and willingness to pay in equity crowdfunding," Business Research, Springer;German Academic Association for Business Research, vol. 13(2), pages 639-661, July.
    21. Christophe Chamley, 2005. "Complementarities in Information Acquisition with Short-Term Trades," Boston University - Department of Economics - Working Papers Series WP2005-027, Boston University - Department of Economics.
    22. Daniel G Arce & Kevin Siqueira, 2014. "Motivating operatives for suicide missions and conventional terrorist attacks," Journal of Theoretical Politics, , vol. 26(4), pages 677-695, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:77:y:2004:i:4:p:895-908. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.jstor.org/journal/jbusiness .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.