Liquidity and Private Information in Asset Markets: To Signal or Not to Signal
34 Pages Posted: 17 Jun 2019 Last revised: 19 Feb 2021
Date Written: May 2019
This paper examines how multidimensional private information by asset sellers affects market equilibrium. I find that when asset quality is the only source of private information, sellers with high-quality assets signal their quality to buyers through partial retention of assets if and only if their liquidity holdings are large. However, when sellers' valuations of liquid assets are also private information, some sellers with high-quality assets signal their quality even if their liquidity holdings are small. The model is extended to study the implications for discount window lending and government asset purchases.
Keywords: Financial Markets, Private Information, Market Efficiency, Monetary Policy
JEL Classification: E44, D82, G14, E52
Suggested Citation: Suggested Citation