Liquidity as Social Expertise

Pablo Kurlat ()

Journal of Finance, 2018, vol. 73, issue 2, 619-656

Abstract: This paper proposes a theory of liquidity dynamics. Illiquidity results from asymmetric information. Observing the historical track record teaches agents how to interpret public information and helps overcome information asymmetry. However, an illiquidity trap can arise: too much asymmetric information leads to the breakdown of trade, which interrupts learning and perpetuates illiquidity. Liquidity falls in response to unexpected events that lead agents to question their valuation models (especially in newer markets) may be slow to recover after a crisis, and is higher in periods of stability.

Date: 2018
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Citations: View citations in EconPapers (9)

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https://doi.org/10.1111/jofi.12606

Related works:
Working Paper: Liquidity as Social Expertise (2015)
Working Paper: Liquidity as Social Expertise (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:73:y:2018:i:2:p:619-656

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