The Value and Liquidity Effects of a Change in Market Conditions
نویسندگان
چکیده
Papers studying the liquidity of a market tend to focus on decisions involving the trade-off between the selling price and the time-till-sale for a given set of market conditions. This paper characterizes the effect of a change in market conditions on a single seller where either a “price-increasing” or a “time-decreasing” change in market conditions can help a seller. Shamelessly stealing from demand theory, I show how the effect of either type of change on price and on the probability-of-sale can be decomposed into a “value effect” and a “liquidity effect.” The analysis focuses on a famously-illiquid market, real estate, but shows how the same ideas can be applied to markets where other selling mechanisms dominate. Two adding-up conditions restrict the set of possible predictions regardless of the mechanism. In this way, I offer a general theory of how markets adjust to changing conditions.
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