Liquidity and capital under uncertainty and changing market sentiment: A simple analysis

Biagio Bossone

Review of Financial Economics, 2014, vol. 23, issue 2, 98-105

Abstract: This study introduces a general approach to investigate resource allocation and asset prices in an economy with uncertainty and shifts in market sentiment. The approach presents a number of key features: first, it proposes a choice-theoretic model that determines the utility that the agents derive from holding assets with different liquidity. Second, it incorporates a variable (endogenously-determined) cost structure of asset liquidation, which reflects the (in)efficiencies of the financial infrastructure and changes in market moods. Third, it also incorporates a model of expectations formation under uncertainty and changing market sentiment. While rich in structure, the approach offers a simple analytical framework to investigate resource allocation decision and asset price dynamics under various sources of uncertainty, and to explore the micro-economics of speculative bubbles and boom–bust sequences. The use of a possible market-specific prudential policy tool is discussed.

Keywords: Money and asset utility; Bubbles and bursts; Information; Liquidity; Market sentiment or mood; Optimistic (pessimistic) expectations; Liquidation (transaction) costs; Resource allocation; Uncertainty (search for similar items in EconPapers)
JEL-codes: E31 E41 E43 G11 G12 G14 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:revfin:v:23:y:2014:i:2:p:98-105

DOI: 10.1016/j.rfe.2013.10.003

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