Liquidity formation and preopening periods in financial markets

Jieying Hong and Sébastien Pouget
Additional contact information
Sébastien Pouget: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

Post-Print from HAL

Abstract: This paper studies the role of preopening periods in liquidity formation and welfare in financial markets. Because no transaction occurs during these preopening periods, their economic significance could be questioned. We model a market where costly participation and asymmetric information prevent latent liquidity from being expressed. At equilibrium, risk-averse insiders use preopening periods to better coordinate supply and demand of liquidity by communicating liquidity needs, thus improving welfare. Partial or full communication of private signals by the insider with the asset at preopening periods does not always enhance liquidity formation, but improves welfare through reducing adverse selection risk faced by the outsider, and increasing the likelihood of her entry. Our findings have implications for portfolio management and the design of financial markets.

Keywords: Asymmetric Information; Liquidity Formation; Preopening Periods (search for similar items in EconPapers)
Date: 2021-07
References: Add references at CitEc
Citations:

Published in Economica, 2021, 88 (351), pp.697-723. ⟨10.1111/ecca.12366⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:hal:journl:hal-03525045

DOI: 10.1111/ecca.12366

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().