Liquid Capital and Market Liquidity

TimothyC. Johnson

Economic Journal, 2009, vol. 119, issue 540, pages 1374-1404

Abstract: This article considers how the supply of liquid capital affects the liquidity of asset markets. The article views the former notion as a technological property of real investments and the latter as an endogenous property of financial market equilibrium, and describes a channel by which the two are linked. When agents hold more wealth in technologically liquid investments, a marginal adjustment to portfolio holdings alters discount rates less, causing a smaller price impact. Thus, even without intermediaries or frictions, the stock of transformable capital may be a crucial determinant of the resilience of financial markets. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Date: 2009

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