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On the dynamics of asset prices and liquidity: the role of search frictions and idiosyncratic shocks

Author

Listed:
  • Elton Dusha

    (University of Chile)

  • Alexandre Janiak

    (Pontificia Universidad Catolica de Chile)

Abstract

We build a consumption asset pricing model with search frictions on the market for assets and idiosyncratic income shocks. Search is directed and a consumption-leisure decision drives the price-liquidity tradeoff: if consumption is marginally more desirable than leisure, a seller would be willing to wait longer for a higher price. Our model is consistent with two characteristics of the housing market, where search frictions are particularly important: i) procyclical liquidity (i.e. countercyclical time to sell) and ii) prices more sensitive to demand shocks.

Suggested Citation

  • Elton Dusha & Alexandre Janiak, 2018. "On the dynamics of asset prices and liquidity: the role of search frictions and idiosyncratic shocks," 2018 Meeting Papers 524, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:524
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    References listed on IDEAS

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    Cited by:

    1. Lake, A., 2020. "Behavioural Finance at Home: Testing Deviations of House Prices from their Fundamental Values," Cambridge Working Papers in Economics 20104, Faculty of Economics, University of Cambridge.

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