The Hidden Costs and Underpinnings of Debt Market Liquidity
Amar V. Bhide
The Fletcher School of Law and Diplomacy
May 30, 2014
Columbia University Center on Capitalism and Society Working Paper No. 79
Few non-financial goods are traded in liquid markets because liquidity requires standardization that suppresses information about their differentiating attributes. The need to suppress information similarly limits easily traded financial claims: buyers normally forgo information to secure liquidity only for the debt and equity of high quality issuers. Yet tradable financial claims, most notably securitized small loans extended to borrowers of unexceptional creditworthiness, have expanded dramatically in the last 30 years. I attribute the expansion to public policies that intentionally and unwittingly favor liquidity over information rather than to Schumpeterian technological advances.
Number of Pages in PDF File: 52
Keywords: securitization, financial stability, financial regulation, liquidity, contracting
JEL Classification: G10, G18, G28, G38, K22, N21working papers series
Date posted: January 27, 2013 ; Last revised: October 25, 2014
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