We use a rational expectations model to examine how public disclosure requirements affect listing decisions by rent-seeking corporate insiders, and allocation decisions by liquidity traders seeking to minimize trading costs. We find that exchanges competing for trading volume engage in a ‘race for the top’ whereunder disclosure requirements increase and trading costs fall. This result is robust...

In standardWalrasian macro-finance models, pecuniary externalities such as fire sales lead to overinvestment in illiquid assets or underprovision of liquidity. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed. In a standard model of liquidity shocks, when liquidity is sufficiently scarce, Cour...

This paper develops a search-theoretic model of the cross-sectional distribution of asset returns, abstracting from risk premia and focusing exclusively on liquidity. I derive a float-adjusted return model (FARM), explaining the pricing of liquidity with a simple linear formula: In equilibrium, the liquidity spread of an asset is proportional to the inverse of its free float, the portion of its...

This paper provides a framework to analyse emergency liquidity assistance of central banks on financial markets in response to aggregate and idiosyncratic liquidity shocks. The model combines the microeconomic view of liquidity as the ability to sell assets quickly and at low costs and the macroeconomic view of liquidity as a medium of exchange that influences the aggregate price level of goods...

Information spillover and liquidity externality across securities is of practical importance to both practitioners and policy makers. We empirically examine how information spillover facilitates liquidity externalities between the equity and corporate bond markets. An event study was conducted by comparing the change of liquidity of stocks whose corporate bonds are TRACE-eligible with that of n...

We lay out and simulate a multi-agent, multi-period model of an RTGS payment system. At the beginning of the day, banks choose how much costly liquidity to allocate to the settlement process. Then, they use it to execute an exogenous, random streamof payment orders. If a bank’s liquidity stock is depleted, payments are queued until new liquidity arrives from other banks, imposing costs on the d...

This paper adopts the methodology used by Fama and French (1993) to construct two measures of liquidity risk. These liquidity proxies solve the empirical issue of comparability between risk factors by utilizing the standardized unit of risk first proposed for size and value effects. As far as I know, this has not been done before. Modeling these additional liquidity premiums indicate an improve...

a r t i c l e i n f o This paper reexamines the liquidity effect on stock expected returns in the NYSE over the period 1926–2008, the pre-1963 period, for which there is a lack of research, and the post-1963 period. The results from the entire sample of 1926–2008 show that expected returns increase with the stock level illiquidity. However, illiquidity level has explanatory power in the cross-s...