Liquidity in asset markets with search frictions

Ricardo Lagos and Guillaume Rocheteau

No 804, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: We develop a search-theoretic model of financial intermediation and use it to study how trading frictions affect the distribution of asset holdings, asset prices, efficiency and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of bid-ask spreads, trade volume and trading delays?all the dimensions of market liquidity that search-based theories seek to explain.

Keywords: Liquidity (Economics); Over-the-counter markets; Investments (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-dge and nep-mst
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Liquidity in Asset Markets With Search Frictions (2009)
Working Paper: Liquidity in asset markets with search frictions (2008)
Working Paper: Liquidity in asset markets with search frictions (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:0804

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DOI: 10.26509/frbc-wp-200804

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