Liquidity and Asset Returns Under Asymmetric Information and Imperfect Competition

Dimitri Vayanos; Jiang Wang

doi:10.1093/rfs/hhr128

Liquidity and Asset Returns Under Asymmetric Information and Imperfect Competition

¹ London School of Economics, Centre for Economic Policy Research, and National Bureau of Economic Research · ² Massachusetts Institute of Technology, China Academy of Financial Research, and National Bureau of Economic Research

Review of Financial Studies 2012

We analyze how asymmetric information and imperfect competition affect liquidity and asset prices. Our model has three periods: Agents are identical in the first, become heterogeneous and trade in the second, and consume asset payoffs in the third. We show that asymmetric information in the second period raises ex ante expected asset returns in the first, comparing both to the case where all private signals are made public and to that where private signals are not observed. Imperfect competition can instead lower expected returns. Each imperfection can move common measures of illiquidity in opposite directions.

DOI: 10.1093/rfs/hhr128
Volume: 25 (5)
Pages: 1339-1365
Language: en
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