Download or read book Liquidity and Asset Returns Under Asymmetric Information and Imperfect Competition written by Dimitri Vayanos and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Theories of Liquidity written by Dimitri Vayanos and published by Now Pub. This book was released on 2012-10 with total page 112 pages. Available in PDF, EPUB and Kindle. Book excerpt: Theories of Liquidity surveys the theoretical literature on market liquidity focusing on six main imperfections studied in that literature: participation costs, transaction costs, asymmetric information, imperfect competition, funding constraints, and search. The authors address three basic questions in the context of each imperfection: (a) how to measure illiquidity, i.e., the lack of liquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. The theoretical literature on market liquidity often employs different modeling assumptions when studying different imperfections. Instead of surveying this literature in a descriptive manner, Theories of Liquidity uses a common, unified model to study all six imperfections that are considered, and for each imperfection addresses the three basic questions within that model. The model generates many of the key results shown in the literature. It also serves as a point of reference for surveying other results derived in different or more complicated settings, and for describing fruitful areas for future research.This survey is related to both market microstructure and asset pricing. It emphasizes fundamental market imperfections covered in the market microstructure literature, and examines how these relate to empirical measures of illiquidity used in that literature. It also examines how market imperfections affect expected asset returns - an asset-pricing exercise - and, in that sense, connects the two areas of research.
Download or read book Market Liquidity written by Thierry Foucault and published by Oxford University Press. This book was released on 2023 with total page 531 pages. Available in PDF, EPUB and Kindle. Book excerpt: "The process by which securities are traded is very different from the idealized picture of a frictionless and self-equilibrating market offered by the typical finance textbook. This book offers a more accurate and authoritative take on this process. The book starts from the assumption that not everyone is present at all times simultaneously on the market, and that participants have quite diverse information about the security's fundamentals. As a result, the order flow is a complex mix of information and noise, and a consensus price only emerges gradually over time as the trading process evolves and the participants interpret the actions of other traders. Thus, a security's actual transaction price may deviate from its fundamental value, as it would be assessed by a fully informed set of investors. The book takes these deviations seriously, and explains why and how they emerge in the trading process and are eventually eliminated. The authors draw on a vast body of theoretical insights and empirical findings on security price formation that have come to form a well-defined field within financial economics known as "market microstructure." Focusing on liquidity and price discovery, the book analyzes the tension between the two, pointing out that when price-relevant information reaches the market through trading pressure rather than through a public announcement, liquidity may suffer. It also confronts many striking phenomena in securities markets and uses the analytical tools and empirical methods of market microstructure to understand them. These include issues such as why liquidity changes over time and differs across securities, why large trades move prices up or down, and why these price changes are subsequently reversed, and why we observe temporary deviations from asset fair values"--
Download or read book Market Liquidity written by Dimitri Vayanos and published by . This book was released on 2012 with total page 87 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we survey the theoretical and empirical literature on market liquidity. We organize both literatures around three basic questions: (a) how to measure illiquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. Using a unified model from Vayanos and Wang (2010), we survey theoretical work on six main imperfections: participation costs, transaction costs, asymmetric information, imperfect competition, funding constraints, and search--and for each imperfection we address the three basic questions within that model. We review the empirical literature through the lens of the theory, using the theory to both interpret existing results and suggest new tests and analysis.
Download or read book Large Investors written by Matt Pritsker and published by . This book was released on 2005 with total page 98 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Inside and Outside Liquidity written by Bengt Holmstrom and published by MIT Press. This book was released on 2013-01-11 with total page 263 pages. Available in PDF, EPUB and Kindle. Book excerpt: Two leading economists develop a theory explaining the demand for and supply of liquid assets. Why do financial institutions, industrial companies, and households hold low-yielding money balances, Treasury bills, and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets, allowing agents to save and share risk more effectively? These questions are at the center of all financial crises, including the current global one. In Inside and Outside Liquidity, leading economists Bengt Holmström and Jean Tirole offer an original, unified perspective on these questions. In a slight, but important, departure from the standard theory of finance, they show how imperfect pledgeability of corporate income leads to a demand for as well as a shortage of liquidity with interesting implications for the pricing of assets, investment decisions, and liquidity management. The government has an active role to play in improving risk-sharing between consumers with limited commitment power and firms dealing with the high costs of potential liquidity shortages. In this perspective, private risk-sharing is always imperfect and may lead to financial crises that can be alleviated through government interventions.
Download or read book The Behavior of Asset Return Moments with Asymmetric Information Price Taking and Risk Aversion written by Steve L. Slezak and published by . This book was released on 1992 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Essays on Asymmetric Information Liquidity and Unemployment written by Ayushi Bajaj and published by . This book was released on 2017 with total page 115 pages. Available in PDF, EPUB and Kindle. Book excerpt: Decentralized markets where assets are useful as medium of exchange are also usually subject to private information. In the first chapter, I analyze how adverse selection affects liquidity and prices in such markets by studying the Shi (1995) and Trejos and Wright (1995) model with Lucas trees under adverse selection. While most studies focus on either pooling or separating equilibrium, I adapt the undefeated equilibrium refinement to make the selection based on fundamentals. Under pooling, the high-quality asset accepts a pooled price, and under separating is willing to signal quality through retention. A negative shock to the quality or quantity of lemons implies a switch in regime from no-information (pooling) to information revelation (separating) which leads to a discontinuous fall in aggregate welfare. In the second chapter I apply insights from the first chapter to help account for the debasement puzzle by interpreting Lucas trees as commodity money of different weights. Debasements constitute a puzzle under standard price theory because people voluntarily exchanged heavy coins for lighter ones; the difference being kept as seigniorage. To resolve this, I adopt Velde, Weber and Wright (1999) featuring a decentralised market with private information on indivisible coins. To disentangle indivisibility from imperfect recognizability, I use a proxy for divisibility by allowing lotteries on coins in trade. Indivisibility accounts for debasement if agents need a medium of exchange for low-value goods, for which heavy coins would not be traded. And, even a small degree of imperfect recognizability provides incentives for debasement due to adverse selection. Finally, in the third chapter I model household's portfolio choice with an endogenous supply of assets under uncertainty to analyze its effect on real interest rates and unemployment. Asset returns typically reflect a risk and liquidity premium, the size of which depends on the state of the economy. This in turn affects unemployment as firms respond to interest rates. In this chapter, I explicitly model demand and supply of liquid assets under uncertainty. Households adjust their portfolios depending on their liquidity needs, and supply of liquid assets is affected by firms' entry decision. An increase in aggregate uncertainty raises interest rates thereby fewer firms enter, and if accompanied by a fall in productivity, unemployment rises by even more. A self-financed private asset purchase program can increase liquidity but leaves unemployment unchanged.
Download or read book Imperfect Competition Information Heterogeneity and Financial Contagion written by Paolo Pasquariello and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines how heterogeneity of private information may induce financial contagion. Using a model of multi-asset trading in which the three main channels of contagion through financial linkages in the literature (correlated information, correlated liquidity, and portfolio rebalancing) are ruled out by construction, I show that financial contagion can still be an equilibrium outcome when speculators receive heterogeneous fundamental information. Risk-neutral speculators trade strategically across many assets to mask their information advantage about one asset. Asymmetric sharing of information among them prevents rational market makers from learning about their individual signals and trades with sufficient accuracy. Incorrect cross-inference about terminal payoffs and contagion ensue. When used to analyze the transmission of shocks across countries, my model suggests that the process of generation and disclosure of information in emerging markets may explain their vulnerability to financial contagion.
Download or read book Liquidity and Asset Prices written by Yakov Amihud and published by Now Publishers Inc. This book was released on 2006 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.
Download or read book Slow Capital Fast Prices written by Stefan Gissler and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Asymmetric Information Repeated Trade and Asset Prices written by James McLoughlin and published by . This book was released on 2012 with total page 170 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial intermediaries play an important role in the pricing of financial assets. For example, intermediaries may act on behalf of consumers in deciding how their wealth is invested, or they may act as providers of liquidity. This dissertation explores several ways in which intermediaries impact price informativeness, the transaction costs investors incur, and investor welfare. In the first chapter, I examine how prices reveal information when intermediaries are informed. Using a model of repeated trade between a long-lived, informed, price-discriminating market maker and risk averse traders with endogenous hedging demands, I first show that traders are weakly better off trading with an informed dealer, as they may learn something about an asset's value in the process of transacting. Second, while long-term incentives can induce an informed market maker to honestly reveal information and increase risk-sharing, they also enable the market maker to hide her information and extract more rents, reducing price informativeness. This less desirable outcome dominates with respect to both the parameter space and a selection criterion. Finally, measures of market quality, such as the transient component of price volatility (illiquidity), may not accurately reflect welfare. The second chapter discusses how relationships affect prices when intermediaries are concerned about adverse selection. When counter-parties trade in OTC markets, such as those for corporate bonds or derivatives, the lack of anonymity implies that future terms of trade can influence prices today. Using a model of repeated trade between an informed trader and uninformed market makers, I show that information asymmetry can affect the markups charged by dealers in two ways. First, for a given market structure (number of market makers), traders with more private information incur lower trading costs because dealers offer better terms to mitigate adverse selection. Second, even when dealers can not compete directly on price quotes, they compete indirectly by improving the informed trader's outside option, though this competition is imperfect. While repeated trade allows two given counter-parties to ameliorate adverse selection, the maximum number of dealers, and hence the total gains achievable, are limited by information frictions. An empirical implication is that the comparative statics of transaction costs only make sense conditional on market structure. The third chapter considers the effect intermediaries have as financial advisors, and whether measures of their performance as mutual fund managers accurately reflect the value they add to an economy. Relative to the existing literature, I look at how the presence of mutual funds affects the price of the underlying asset in an economy. Once this pricing effect is accounted for, I show that standard measures of mutual fund performance may not accurately reflect whether fund management is welfare improving.
Download or read book Asset Returns and the Listing Choice of Firms written by Shmuel Baruch and published by . This book was released on 2006 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a mechanism that relates asset returns to the firm's optimal listing choice. The crucial element in our framework is not a difference in the structure or rules of the alternative markets, but a difference in the return patterns of the securities that are traded on these markets. We use a simple trading model with asymmetric information to show that a stock will be more liquid when it is listed on a market where quot;similarquot; securities, or securities with which its value innovations are more correlated, are traded. We empirically examine the implications of our model using NYSE and Nasdaq securities, and document that the return patterns of securities listed on the NYSE indeed look different from the return patterns of Nasdaq securities. Stocks that are eligible to list on the other market but do not switch have return patterns that are similar to those of other securities on their own market but different from the return patterns of securities listed on the other market. We show that the return patterns of stocks that switch markets change in the two years prior to the move to be more similar to the return patterns of securities listed on the new market. Furthermore, the greatest improvement in liquidity is experienced by the switching stocks whose return patterns resemble most the return patterns of securities listed on the new market. Our results suggest that managers make listing decisions that enhance the liquidity of their firms' stocks.
Download or read book Limited Liquidity Market Asymmetry and Stylized Facts of Asset Returns written by Jakob Krause and published by . This book was released on 2017 with total page 11 pages. Available in PDF, EPUB and Kindle. Book excerpt: Starting from the premise that hedging pressure is based on limited market efficiency I provide an analogy that electricity markets over years behave like intraday stock or FX markets during the liquidation of a block trade. In this endeavour I relate the returns of some liquidity exploitation strategies with the degree of liquidity metrics by utilising the characteristic initial endowments of market participants in electricity markets. In a second step I introduce a simple stochastic model that is able to capture a variety of stylized facts of asset returns (first order price impact, Samuelson Effect, negative prices) over the whole life span of the contract and that circumvents typical information modeling pitfalls for non-storable commodities. This argument is based on modeling 'market impact' as an additional asset with a known terminal value and is justified by an enlargement of filtration argument.
Download or read book Asymmetric Information and Asset Returns written by Olaf Erik Fuchs and published by . This book was released on 1997 with total page 270 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Asymmetric Information and the Market Structure of the Banking Industry written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 1998-06-01 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper analyzes the effects of informational asymmetries on the market structure of the banking industry in a multi-period model of spatial competition. All lenders face uncertainty with regard to borrowers’ creditworthiness, but, in the process of lending, incumbent banks gather proprietary information about their clients, acquiring an advantage over potential entrants. These informational asymmetries are an important determinant of the industry structure and may represent a barrier to entry for new banks. The paper shows that, in contrast with traditional models of horizontal differentiation, the steady-state equilibrium is characterized by a finite number of banks even in the absence of fixed costs.
Download or read book Market Microstructure Theory written by Maureen O'Hara and published by John Wiley & Sons. This book was released on 1998-03-06 with total page 310 pages. Available in PDF, EPUB and Kindle. Book excerpt: Written by one of the leading authorities in market microstructure research, this book provides a comprehensive guide to the theoretical work in this important area of finance.
