Liquidity and Market Structure

Sanford Jay Grossman and Merton H. Miller

No 2641, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Market liquidity is modeled as being determined by the demand and supply of immediacy. Exogenous liquidity events coupled with the risk of delayed trade create a demand for immediacy. Market makers supply immediacy by their continuous presence. and willingness to bear risk during the time period between the arrival of final buyers and sellers. In the long run the number of market makers adjusts to equate the supply and demand for immediacy. This determine the equilibrium level of liquidity in the market. The lower is the autocorrelation in rates of return, the higher is the equilibrium level of liquidity.

Date: 1989-02
Note: ME
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Related works:
Working Paper: LIQUIDITY AND MARKET STRUCTURE (1988)
Journal Article: Liquidity and Market Structure (1988)
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