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Liquidity and Prices in Decentralized Markets with Almost Public Information

Anton Tsoy

No 8, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a dynamic equilibrium model of decentralized asset markets with both search delays and endogenous bargaining delays arising in the limit of almost public information about the asset quality. The model has several implications for liquidity and prices. First, conditional on the public information, the liquidity is U-shaped in the quality and assets in the middle of the quality range may not be traded at all. Second, search and bargaining frictions have opposite effects on the market liquidity showing that transparency, while welfare improving, may also hurt the market liquidity. Third, the substitutability of different asset classes leads to flights-to-liquidity during periods of market uncertainty and reveals adverse effects of gradual transparency policies. Finally, the paper derives the effect of asset liquidity, market liquidity and market tightness on asset prices.

New Economics Papers: this item is included in nep-com, nep-dge, nep-ger, nep-mic and nep-mst
Date: 2016
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