Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
956601 | Journal of Economic Theory | 2016 | 31 Pages |
Abstract
We study how asset prices are affected by the amount of liquidity that is available in over-the-counter asset markets where dealers post prices and quantities at which they are willing to buy and sell assets. We find that higher levels of market liquidity lead to higher asset prices and lower bid–ask spreads. Hence, an increase in inflation—which lowers market liquidity—increases asset returns and decreases asset prices. When agents' immediate consumption needs are stochastic, asset prices will fluctuate even though asset fundamentals are unchanging. The fluctuations in asset prices reflect the stochastic availability of market liquidity that results from agents' changing consumption opportunities.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Fabrizio Mattesini, Ed Nosal,