this paper argues that a risk averse of workers after-tax reservation wage the difference between her reservation wage and the tax needed to fund the unemployment insurance system when liquidity constraint binds exists and it is unique. the optimality of unemployment insurance based on the responsiveness of reservation wage to unemployment benefit shows the disincentive effect, i.e. higher unem...

Stock Liquidity and Corporate Cash Holdings: Feedback and the Cash as Ammunition Hypothesis We advance the feedback/cash as ammunition hypothesis, namely that firms hold cash to address feedback from stock prices to cash flows and growth opportunities. Firms with more liquid stocks are expected to hold more cash, the opposite of the prediction from a standard information asymmetry perspective o...

In a market with short term agents and heterogeneous information, when liquidity trading displays persistence, prices reflect average expectations about fundamentals and liquidity trading. Informed investors exploit a private learning channel to infer the demand of liquidity traders from the order flow to anticipate the evolution of the future aggregate demand for the stock. This yields multipl...

This paper presents a dynamic portfolio choice model to analyze the liquidity premium necessary to compensate an investor for the adverse price impact of trading. By calibrating the model to empirically reasonable parameter values, we generate a plausible liquidity premium. Specifically, the premium is an increasing, concave function of price impact. It increases with the investor’s initial wea...

We present a new measure of liquidity known as “latent liquidity” and apply it to a unique corporate bond database. Latent liquidity is defined as the weighted average turnover of investors who hold a bond, where the weights are the fractional investor holdings. It can be used to measure liquidity in markets with sparse transactions data. For bonds that trade frequently, our measure has predict...

It is commonly believed that the Fed’s ability to control the federal funds rate stems from its ability to alter the supply of liquidity in the overnight market through open market operations. This paper uses daily data compiled by the author from the records of the Trading Desk of the Federal Reserve Bank of New York over the period March 1, 1984, through December 31, 1996: He analyzes the Des...

Japan has been in a benign liquidity trap since the 1990s. In a benign liquidity trap, interest rates approach zero and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper introduces a monetary general equilibrium model that is compatible with Japan’s performance and resolves puzzles associated with liquidi...

A liquidity risk stress-testing framework with interaction between market and credit risks Eric Wong* and Cho-Hoi Hui* This version: April 11, 2011 Abstract This study develops a framework for stress testing banks’ liquidity risk, where liquidity and default risks can stem from market risk arising from asset price shocks. The risks are assumed to be transmitted through three channels. First, ba...

This study investigates the relationship between earnings management and equity liquidity, positing that as incentives arise for the manipulation of firm performance through earnings management (due partly to conflicts of interest between firm insiders and outsiders), greater earnings management may signal higher adverse selection costs. If earnings manipulation reveals aggressive accounting pr...

Liquidity constitutes one of the main determinants of implicit transaction costs. Deriving optimal execution strategies that minimize transaction costs, automated trading engines need to forecast future liquidity levels. By means of an empirical study we provide evidence that the publication of regulatory corporate disclosures is followed by abnormal liquidity levels. As we do not find abnormal...