We show that the interplay between endogenous limited participation and credit lines creates asset price bubbles in a simple exchange economy with three types of agents: regular stockholders, arbitrageurs and liquidity providers. Regular stockholders are worse off in the economy with credit...

We present comprehensive evidence in support of giving liquidity equal standing to size, value/growth, and momentum as investment styles, as defined by Sharpe (1992). First, we show that financial market liquidity, as identified by stock turnover, is an economically significant indicator of...

We show in a fairly general setting of a buyer and seller with the same preferences trading two related assets so as to share volatility risk that illiquidity and virtually all impediments to trade cannot be priced. This is because the buying and selling counterparties must both be optimizing....

We consider customised liquidity pools (CLP), which are trading venues that offer over-the-counter brokerage and dealer services to selected market participants. The dealer activity, whereby two-sided liquidity is offered to a limited pool of clients, shares in common similarities with the...

In the standard approach to fund valuation, it is often assumed that markets are perfectly liquid and hence assets have unique prices. In practice, however, as has been widely documented, this is not the case. Asset values are impacted by deterioration of market liquidity (market depth)....

In this paper, we show both theoretically and empirically that the size of over-the-counter (OTC) markets can be reduced without affecting individual net positions. First, we find that the networked nature of these markets generates an excess of notional obligations between the aggregate gross...

We consider the stochastic control problem of how to optimally close a large asset position in an illiquid market with price impact. We assume that the risk attributed to an open position depends on the price evolvement since the beginning of the trading period. Within a continuous-time model...

Using a real-time random regime shift technique, we identify and discuss two different regimes in the dynamics of credit spreads during 2002-2012: a liquidity regime and a default regime. Both regimes contribute to the patterns observed in credit spreads. The liquidity regime seems to explain...

Asset-pricing models with volume are challenged by the high turnover-rates in real stock markets. We develop an asset-pricing framework with heterogeneous risk preferences and show that liquidity and turnover increase with heterogeneity to a maximum, and then decline. With U.S. parameters,...

We consider an optimal execution problem where an agent holds a position in an asset which must be liquidated (using limit orders) before a terminal horizon. Beginning with a standard model for the trading dynamics, we analyse how the acknowledgement of model misspecification affects the agent's...