Liquidity in asset markets with search frictions

Ricardo Lagos and Guillaume Rocheteau

No 408, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We develop a search-theoretic model of financial intermediation and use it to study how trading frictions affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of bid-ask spreads, trade volume, and trading delays - all the dimensions of market liquidity that search-based theories seek to explain. ; This paper is an extension of Ricardo Lagos's work while he was in the Research Department of the Federal Reserve Bank of Minneapolis.

Keywords: Liquidity (Economics); Search theory (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-dge and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.minneapolisfed.org/research/SR/SR408.pdf
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3961 (application/pdf)

Related works:
Journal Article: Liquidity in Asset Markets With Search Frictions (2009)
Working Paper: Liquidity in asset markets with search frictions (2008)
Working Paper: Liquidity in asset markets with search frictions (2007)
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:fip:fedmsr:408

Access Statistics for this paper

More papers in Staff Report from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().