Opacity and Liquidity

European Banking Center Discussion Paper No. 2013-012

CentER Discussion Paper No. 2013-066

47 Pages Posted: 30 Nov 2013 Last revised: 7 Dec 2014

See all articles by André Stenzel

André Stenzel

University of Mannheim and MaCCI

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 7, 2014

Abstract

We present a model that links the opacity of an asset to its liquidity. While low opacity assets are liquid, intermediate levels of opacity provide incentives for investors to acquire private information, causing adverse selection and illiquidity. High opacity, however, benefits liquidity by reducing the value of a unit of private information to investors. The cross-section of bid-ask spreads of U.S. firms is shown to be consistent with this hump-shape relationship between opacity and illiquidity. The analysis suggests that uniform disclosure requirements may not be desirable; optimal information provision can be achieved by subsidizing information. The model also delivers predictions about when it is optimal for asset originators to sell intransparent products or pools composed of correlated assets.

Keywords: endogenous information acquisition, opacity, asset liquidity

Suggested Citation

Stenzel, André and Wagner, Wolf, Opacity and Liquidity (December 7, 2014). CentER Discussion Paper No. 2013-066. Available at SSRN: https://ssrn.com/abstract=2361434 or http://dx.doi.org/10.2139/ssrn.2361434

André Stenzel (Contact Author)

University of Mannheim and MaCCI ( email )

Department of Economics, University of Mannheim
L7, 3-5
Mannheim, 68131
Germany

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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