Opacity and Liquidity

Wolf Wagner () and Andre Stenzel

No 10665, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a model that links the opacity of an asset to its liquidity. While low opacity assets are liquid, intermediate levels of opacity provide incentives for investors to acquire private information, causing adverse selection and illiquidity. High opacity, however, benefits liquidity by reducing the value of a unit of private information to investors. The cross-section of bid-ask spreads of U.S. firms is shown to be consistent with this hump-shape relationship between opacity and illiquidity. The analysis suggests that uniform disclosure requirements may not be desirable; optimal information provision can be achieved by subsidizing information. The model also delivers predictions about when it is optimal for asset originators to sell intransparent products or pools composed of correlated assets.

Keywords: Asset liquidity; Endogenous information acquisition; Opacity (search for similar items in EconPapers)
JEL-codes: D82 G14 G18 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Opacity, Liquidity and Disclosure Policies (2018)
Working Paper: Asset Opacity and Liquidity (2013)
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