Liquidity in asset markets with search frictions

Ricardo Lagos, Guillaume Rocheteau

    Research output: Contribution to journalArticle

    Abstract

    We develop a search-theoretic model of financial intermediation in an over-the-counter market and study how trading frictions affect the distribution of asset holdings and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of trade volume, bid-ask spreads, and trading delays - the dimensions of market liquidity that search-based theories seek to explain.

    Original languageEnglish (US)
    Pages (from-to)403-426
    Number of pages24
    JournalEconometrica
    Volume77
    Issue number2
    DOIs
    StatePublished - Mar 2009

    Fingerprint

    Search frictions
    Liquidity
    Assets
    Asset markets
    Friction
    Illiquid markets
    Trade volume
    Asset demand
    Financial intermediation
    Market liquidity
    Bid/ask spread

    Keywords

    • Bid-ask spreads
    • Liquidity
    • Search
    • Trade volume
    • Trading delays

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Liquidity in asset markets with search frictions. / Lagos, Ricardo; Rocheteau, Guillaume.

    In: Econometrica, Vol. 77, No. 2, 03.2009, p. 403-426.

    Research output: Contribution to journalArticle

    Lagos, R & Rocheteau, G 2009, 'Liquidity in asset markets with search frictions', Econometrica, vol. 77, no. 2, pp. 403-426. https://doi.org/10.3982/ECTA7250
    Lagos, Ricardo ; Rocheteau, Guillaume. / Liquidity in asset markets with search frictions. In: Econometrica. 2009 ; Vol. 77, No. 2. pp. 403-426.
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