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Opacity and Liquidity

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  • Wagner, Wolf
  • Stenzel, André

Abstract

We present a model that links the opacity of an asset to its liquidity. While low opacity assets are liquid, intermediate levels of opacity provide incentives for investors to acquire private information, causing adverse selection and illiquidity. High opacity, however, benefits liquidity by reducing the value of a unit of private information to investors. The cross-section of bid-ask spreads of U.S. firms is shown to be consistent with this hump-shape relationship between opacity and illiquidity. The analysis suggests that uniform disclosure requirements may not be desirable; optimal information provision can be achieved by subsidizing information. The model also delivers predictions about when it is optimal for asset originators to sell intransparent products or pools composed of correlated assets.

Suggested Citation

  • Wagner, Wolf & Stenzel, André, 2015. "Opacity and Liquidity," CEPR Discussion Papers 10665, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10665
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    Cited by:

    1. Wagner, Wolf & Uras, Burak, 2017. "Efficient Lemons," CEPR Discussion Papers 11803, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Asset liquidity; Endogenous information acquisition; Opacity;
    All these keywords.

    JEL classification:

    • 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
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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