Market Liquidity -- Theory and Empirical Evidence

89 Pages Posted: 28 Jul 2012 Last revised: 11 Aug 2012

See all articles by Dimitri Vayanos

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)

Date Written: July 2012

Abstract

In this paper we survey the theoretical and empirical literature on market liquidity. We organize both literatures around three basic questions: (a) how to measure illiquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. Using a unified model from Vayanos and Wang (2010), we survey theoretical work on six main imperfections: participation costs, transaction costs, asymmetric information, imperfect competition, funding constraints, and search---and for each imperfection we address the three basic questions within that model. We review the empirical literature through the lens of the theory, using the theory to both interpret existing results and suggest new tests and analysis.

Suggested Citation

Vayanos, Dimitri and Wang, Jiang, Market Liquidity -- Theory and Empirical Evidence (July 2012). NBER Working Paper No. w18251, Available at SSRN: https://ssrn.com/abstract=2119006

Dimitri Vayanos (Contact Author)

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Center for Economic Policy Research (CEPR)

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Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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China Academy of Financial Research (CAFR)

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