Abstract

http://ssrn.com/abstract=1729408
 
 

Footnotes (78)



 


 



Comatose Markets: What if Liquidity is Not the Norm?


Aswath Damodaran


New York University - Stern School of Business

December 23, 2010


Abstract:     
Much of financial theory and practice is built on the presumption that markets are liquid. In a liquid market, you should be able to buy or sell any asset, in any quantity, at the prevailing market price and with no transactions costs. Using that definition, no asset is completely liquid and there are wide variations in liquidity across asset classes, across assets within each asset class, and across investors. After presenting evidence to back up this proposition and recognizing that investors care about and price in illiquidity, we evaluate how introducing illiquidity into the decision process not only alters portfolio composition but has a divergent impact on investors with different time horizons and investment strategies. The presence and pricing in of liquidity opens up profitable opportunities for two classes of investors: long-term investors who care about less about liquidity than the rest of the market (liquidity arbitrageurs) and investors who can time shifts in market liquidity (liquidity timers). In illiquid markets, firms will also be more sparing in their use of debt, will pay higher dividends, will buy back less stock and will accumulate more cash.

Number of Pages in PDF File: 73

Keywords: liquidity, illiquidity, marketability, transactions costs, trading halts

JEL Classification: G11, G12, G31, G32, G35

working papers series


Download This Paper

Date posted: December 22, 2010 ; Last revised: January 11, 2011

Suggested Citation

Damodaran, Aswath, Comatose Markets: What if Liquidity is Not the Norm? (December 23, 2010). Available at SSRN: http://ssrn.com/abstract=1729408 or http://dx.doi.org/10.2139/ssrn.1729408

Contact Information

Aswath Damodaran (Contact Author)
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)
HOME PAGE: http://www.damodaran.com
Feedback to SSRN


Paper statistics
Abstract Views: 4,551
Downloads: 1,149
Download Rank: 8,529
Footnotes:  78

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.469 seconds