*Liquid Capital and Market Liquidity

31 Pages Posted: 8 Oct 2009

See all articles by Timothy C. Johnson

Timothy C. Johnson

University of Illinois at Urbana-Champaign

Date Written: 0000

Abstract

This article considers how the supply of liquid capital affects the liquidity of asset markets. The article views the former notion as a technological property of real investments and the latter as an endogenous property of financial market equilibrium, and describes a channel by which the two are linked. When agents hold more wealth in technologically liquid investments, a marginal adjustment to portfolio holdings alters discount rates less, causing a smaller price impact. Thus, even without intermediaries or frictions, the stock of transformable capital may be a crucial determinant of the resilience of financial markets.

Suggested Citation

Johnson, Timothy C., *Liquid Capital and Market Liquidity (0000). The Economic Journal, Vol. 119, Issue 540, pp. 1374-1404, October 2009, Available at SSRN: https://ssrn.com/abstract=1484210 or http://dx.doi.org/10.1111/j.1468-0297.2009.02293.x

Timothy C. Johnson (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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