Presidential Address: Liquidity and Price Discovery

Maureen O'Hara

Journal of Finance, 2003, vol. 58, issue 4, 1335-1354

Abstract: This paper examines the implications of market microstructure for asset pricing. I argue that asset pricing ignores the central fact that asset prices evolve in markets. Markets provide liquidity and price discovery, and I argue that asset pricing models need to be recast in broader terms to incorporate the transactions costs of liquidity and the risks of price discovery. I argue that symmetric information‐based asset pricing models do not work because they assume that the underlying problems of liquidity and price discovery have been solved. I develop an asymmetric information asset pricing model that incorporates these effects.

Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:58:y:2003:i:4:p:1335-1354

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