Liquidity and asset prices in a monetary model with OTC asset markets

Fabrizio Mattesini and Ed Nosal

Journal of Economic Theory, 2016, vol. 164, issue C, 187-217

Abstract: We study how asset prices are affected by the amount of liquidity that is available in over-the-counter asset markets where dealers post prices and quantities at which they are willing to buy and sell assets. We find that higher levels of market liquidity lead to higher asset prices and lower bid–ask spreads. Hence, an increase in inflation—which lowers market liquidity—increases asset returns and decreases asset prices. When agents' immediate consumption needs are stochastic, asset prices will fluctuate even though asset fundamentals are unchanging. The fluctuations in asset prices reflect the stochastic availability of market liquidity that results from agents' changing consumption opportunities.

Keywords: Liquidity; Asset pricing; OTC markets; Inflation (search for similar items in EconPapers)
JEL-codes: E41 E44 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (32)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:164:y:2016:i:c:p:187-217

DOI: 10.1016/j.jet.2015.11.001

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