Business, Liquidity, and Information Cycles

Gorkem Bostanci and Guillermo Ordonez

No 32501, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Stock markets play a dual role: help allocate capital by conveying information about firms’ fundamentals and provide liquidity by quickly turning stocks into cash. We propose a trading model in which these two roles are endogenously related: more intensive use of stocks for liquidity affects both the information and the noise about fundamentals contained in prices. We structurally estimate stock price informativeness for several countries and show that it sharply declines when the banking system has trouble providing liquidity. We incorporate this module into a dynamic general equilibrium model to study the real effects of this mechanism through capital misallocation across heterogeneous firms. Calibrating the model for the US, we show that, due to less informative stock markets, the output loss is 43% larger if recessions are accompanied by liquidity distress.

JEL-codes: D53 D82 E32 G11 G12 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mst
Note: AP EFG ME PR
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w32501.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:32501

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w32501
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().