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Liquidity and Asset Prices: A Unified Framework

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  • Dimitri Vayanos
  • Jiang Wang

Abstract

We examine how liquidity and asset prices are affected by the following market imperfections: asymmetric information, participation costs, transaction costs, leverage constraints, non-competitive behavior and search. Our model has three periods: agents are identical in the first, become heterogeneous and trade in the second, and consume asset payoffs in the third. We examine how imperfections in the second period affect different measures of illiquidity, as well as asset prices in the first period. Besides nesting multiple imperfections in a single model, we derive new results on the effects of each imperfection. Our results imply, in particular, that imperfections do not always raise expected returns, and can influence common measures of illiquidity in opposite directions.

Suggested Citation

  • Dimitri Vayanos & Jiang Wang, 2009. "Liquidity and Asset Prices: A Unified Framework," NBER Working Papers 15215, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15215
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    4. Ingomar Krohn & Philippe Mueller & Paul Whelan, 2024. "Foreign Exchange Fixings and Returns around the Clock," Journal of Finance, American Finance Association, vol. 79(1), pages 541-578, February.
    5. Eric van Wincoop & Cedric Tille & Philippe Bacchetta, 2010. "On the Dynamics of Leverage, Liquidity, and Risk," 2010 Meeting Papers 393, Society for Economic Dynamics.

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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