Endogenous liquidity and volatility

Guillaume Rocheteau and Lu Wang

Journal of Economic Theory, 2023, vol. 210, issue C

Abstract: Is asset liquidity a source of price volatility? We answer this question within a continuous-time, New Monetarist economy under extrinsic uncertainty where the role of an asset to finance expenditure shocks depends on its pledgeability. If assets are intrinsically valuable and pledgeability is exogenous, then their prices are invariant to extrinsic uncertainty – unlike environments with discrete-time pricing that can feature sunspot equilibria. We derive conditions under which extrinsic uncertainty matters when pledgeability is endogenous and varies with the asset price or its rate of return. In the latter case, we link sunspot equilibria to deterministic cycles.

Keywords: Search; Money; Liquidity; Extrinsic uncertainty (search for similar items in EconPapers)
JEL-codes: D82 D83 E40 E50 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053123000480
Full text for ScienceDirect subscribers only

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:eee:jetheo:v:210:y:2023:i:c:s0022053123000480

DOI: 10.1016/j.jet.2023.105652

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().