Year: 2008
Type: report
Abstract: In this paper, we develop an equilibrium model for stock market liquidity and its impact on asset prices when constant market presence is costly.We show that even when agents' trading needs are perfectly matched, costly market presence prevents them from synchronizing their trades and hence gives rise to endogenous order imbalances and the need for liquidity.Moreover, the endogenous liquidity need, when it occurs, is characterized by excessive selling of significant magnitudes.Such liquidity-driven selling leads to market crashes in the absence of any aggregate shocks.Finally, we show that illiquidity in the market leads to high expected returns, negative and asymmetric return serial correlation, and a positive relation between trading volume and future returns.We also propose new measures of liquidity based on its asymmetric impact on prices and demonstrate a negative relation between these measures and expected stock returns.
DOI: 10.3386/w14013
Authors: Jennifer Huang, Jiang Wang
Institutions: National Bureau of Economic Research, Hong Kong University of Science and Technology, University of Washington, University of Michigan, University of Wisconsin–Milwaukee, Federal Reserve Bank of New York, Massachusetts Institute of Technology, The University of Texas at Austin, Stanford University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2891000177