Liquidity and Private Information in Asset Markets: To Signal or Not to Signal

34 Pages Posted: 17 Jun 2019 Last revised: 19 Feb 2021

See all articles by Zijian Wang

Zijian Wang

University of Western Ontario - Department of Economics

Date Written: May 2019

Abstract

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

Wang, Zijian, Liquidity and Private Information in Asset Markets: To Signal or Not to Signal (May 2019). Journal of Economic Theory, Vol. 190, 2020, Available at SSRN: https://ssrn.com/abstract=3400267 or http://dx.doi.org/10.2139/ssrn.3400267

Zijian Wang (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

HOME PAGE: http://sites.google.com/view/zijianwang/

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