Liquidity and market crashes
By: Jennifer Huang, Jiang Wang.
Contributors: Wang, Jiang, 1959-; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 14013; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 14013.
Publisher: National Bureau of Economic Research
Published: 2008
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "In this paper, we develop an equilibrium model for stock market liquidity and its impact on asset prices when constant market presence is costly.  We show that even when agents' trading needs are perfectly matched, costly market presence prevents them from synchronizing their trades and hence gives rise to endogenous order imbalances and the need for liquidity.  Moreover, the endogenous liquidity need, when it occurs, is characterized by excessive selling of significant magnitudes.  Such liquidity-driven selling leads to market crashes in the absence of any aggregate shocks.  Finally, we show that illiquidity in the market leads to high expected returns, negative and asymmetric return serial correlation, and a positive relation between trading volume and future returns.  We also propose new measures of liquidity based on its asymmetric impact on prices and demonstrate a negative relation between these measures and expected stock returns"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/10/2008.

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