Theories of Liquidity

Dimitri Vayanos and Jiang Wang

Foundations and Trends(R) in Finance, 2012, vol. 6, issue 4, 221-317

Abstract: We survey the theoretical literature on market liquidity. The literature traces illiquidity, i.e., the lack of liquidity, to underlying market imperfections. We consider six main imperfections: participation costs, transaction costs, asymmetric information, imperfect competition, funding constraints, and search. We address three questions in the context of each imperfection: (a) how to measure illiquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. We nest all six imperfections within a common, unified model, and use that model to organize the literature.

Keywords: Liquidity; Market imperfections; Asymmetric information; Market microstructure (search for similar items in EconPapers)
JEL-codes: G G10 G14 L13 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:now:fntfin:0500000014

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