Journal of Financial Economics Vol. 80 No. 3 2006
Dynamic liquidity in endowment economies
Abstract
This paper analyzes endogenous variations in aggregate liquidity that arise in standard representative-agent endowment economies. I introduce a natural definition of liquidity, essentially a shadow elasticity, that characterizes the price impact function or bid/ask spread that a small trader would experience. I compute this quantity for some tractable examples and uncover a rich variety of predictions that, in some cases, appear consistent with levels and covariations observed in the data. The results have important implications for the pricing and hedging of liquidity risk.
- DOI
- 10.1016/j.jfineco.2005.05.004
- Volume
- 80
- Issue
- 3
- Pages
- 531-562
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref