Liquidity and asset prices: a VECM approach

Attila Ács

MPRA Paper from University Library of Munich, Germany

Abstract: The recent financial and economic crisis highlighted the importance to better understand the relationship between liquidity developments and asset price movements. Central banks with focus on inflation targeting allowed asset price inflation, following burst, with its devastating consequences for the financial system and real economy. Equilibrium price should emanate from fundamentals. However liquidity conditions are part of fundamental variables and should be taken into consideration as explanatory variables in the process of asset pricing. Furthermore in many cases assets serve as collateral in refinancing which means that refinancing conditions influence values of pledged assets.

Keywords: liquidity; asset pricing; broker dealer; repo; error correction (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:40331

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