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  1. Home
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  3. Market Liquidity
  • Cited by 21
Publisher:
Cambridge University Press
Online publication date:
December 2012
Print publication year:
2012
Online ISBN:
9780511844393
DOI:
https://doi.org/10.1017/CBO9780511844393
Subjects:
Economics, Mathematics, Mathematical Finance, Finance and Accountancy
Information

Book description

This book presents the theory and evidence on the effect of market liquidity and liquidity risk on asset prices and on overall securities market performance. Illiquidity means incurring a high transaction cost, which includes a large price impact when trading and facing a long time to unload a large position. Liquidity risk is higher if a security becomes more illiquid when it needs to be traded in the future, which will raise trading cost. The book shows that higher illiquidity and greater liquidity risk reduce securities prices and raise the expected return that investors require as compensation. Aggregate market liquidity is linked to funding liquidity, which affects the provision of liquidity services. When these become constrained, there is a liquidity crisis which leads to downward price and liquidity spiral. Overall, the volume demonstrates the important role of liquidity in asset pricing.

Reviews

‘These authors were writing and teaching about the importance of understanding liquidity way before we all learned more about it than we cared to. They have made major contributions to understanding the real, not purely theoretical, world that investors face every day. Gathering their seminal work in one place along with updated perspectives and overviews is a serious contribution.’

Cliff Asness - AQR Capital Management

‘Over the past quarter century, the research contributions of Amihud, Mendelson, and Pedersen have been central to an understanding of the determinants and pricing of market liquidity and liquidity risk. This collection places the best available work on the topic between two covers. It must be read by anyone following this subject area.’

Darrell Duffie - Stanford University

‘The liquidity of financial markets has never been a more important topic of research and policy and this book gives a very accessible way to understand both the traditional and current research. The book reproduces eight papers that range from the seminal work that defined the field starting in the 1980s to the recent research based on the analysis of the financial crisis. A particular feature of the book is the series of extended introductions to each of the papers, written nontechnically to summarize each paper and how it fits into future research - they will transport you to a first rate graduate classroom.’

Robert Engle - Nobel Laureate and Director, Volatility Institute, New York University

‘The term ‘market liquidity’ means different things to different people at different times. Distinguishing, defining, and measuring the different meanings is an important activity, especially now, after four years of financial crises. This collection of scientific papers by eminent scholars is an important contribution to understanding market frictions and arrangements to manage them.’

Thomas Sargent - Nobel Laureate, New York University

‘The authors have made substantial contributions in microstructure, and especially in the understanding of liquidity, for years. This collection of their best articles on liquidity is particularly timely given the growing realization of the macro pathology caused by a financial-crisis-induced recession. They present strong evidence that a liquidity spiral hurts post-recession real investment.’

David Whitcomb - author of Securities Market Microstructure and Founder, Automated Trading Desk

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Contents

Contents
References
References for Introductions and Summaries
Acharya, Viral VAmihud, YakovBharath, Sreedhar 2010
Acharya, Viral VViswanathan, S 2011 Leverage, moral hazard and liquidityJournal of Finance 66 99
Amihud, YakovHameed, AllaudeenKang, WenjinZhang, Huiping 2011 The liquidity premium: International evidenceWorking paperNew YorkUniversity, Stern School of Business
Amihud, YakovMendelson, Haim 1980 Market making with inventoryJournal of Financial Economics 8 31
Amihud, YakovMendelson, Haim 1986 Liquidity and stock returnsFinancial Analysts Journal 42 43
Amihud, YakovHaim, Mendelson 1987 Trading mechanisms and stock returns: An empirical investigationJournal of Finance 42
Amihud, YakovMendelson, Haim 1987 Are trading rule profits feasibleJournal of Portfolio Management 14 77
Amihud, YakovMendelson, Haim 1988 Liquidity and asset prices: Financial management implicationsFinancial Management 17 5
Amihud, YakovMendelson, Haim 2012 Liquidity, the value of the firm, and corporate financeJournal of Applied Corporate Finance 24 17
Amihud, YakovMendelson, HaimGoyenko, Ruslan 2010 The excess return on illiquid stocksNew YorkUniversity, Stanford University, McGill University
Amihud, YakovMendelson, HaimPedersen, Lasse Heje 2005 Liquidity and asset pricesFoundations and Trends in Finance 1 269
Aragon, George OStrahan, Philip E 2010
Anginer, Deniz 2010
Ashcraft, AdamGarleanu, NicolaePedersen, Lasse Heje 2010 Two monetary tools: Interest rates and haircutsNBER Macroeconomics Annual
Asness, CliffFrazzini, AndreaPedersen, Lasse Heje 2012 Leverage aversion and risk parityFinancial Analysts Journal 68 47
Atkins, Allen BDyl, Edward A 1997 Transaction costs and holding periods for common stocksJournal of Finance 52 309
Bekaert, GeertHarvey, Campbell RLundblad, Christian 2007 Liquidity and expected returns: Lessons from emerging marketsReview of Financial Studies 20 1781
Berge, KlausConsigli, GiorgioZiemba, William T 2008 The predictive ability of the bond-stock earnings yield differential modelJournal of Portfolio Management 34 63
Bowen, DavidHutchison, Mark CO’Sulliva, Niall 2010
Brennan, Michael JSubrahmanyam, Avanidhar 1996 Market microstructure and asset pricing: On the compensation for illiquidity in stock returnsJournal of Financial Economics 41 441
Brunnermeier, MarkusPedersen, Lasse Heje 2005 Predatory tradingJournal of Finance 60 1825
Carhart, Mark M 1997 On persistence in mutual fund performanceJournal of Finance 52 57
Chen, LongLesmond, David AWei, Jason Z 2007 Corporate yield spreads and bond liquidityJournal of Finance 62 119
Chordia, TarunRoll, RichardSubrahmanyam, Avanidhar 2000 Commonality in liquidityJournal of Financial Economics 56 3
CFTC-SEC 2010
Comerton-Forde, CarolHendershott, Terrence, Charles MJones, , Pamela CMoulton, , Mark SSeasholes, 2010 Time variation in liquidity: The role of market-maker inventories and revenuesJournal of Finance 65 295
Datar, Vinay TNaik, Narayan YRadcliffe, Robert 1998 Liquidity and stock returns: An alternative testJournal of Financial Markets 1 203
DeJong, FrankDriessen, Joost 2007
Dias, Jorge DFerreira, Miguel A 2005
Dick-Nielsen, JensFeldhutter, PeterLando, David 2011
Duarte, JeffersonYoung, Lance 2009 Why is priced?Journal of Financial Economics 91 119
Duffie, Darrell 2010 Asset price dynamics with slow-moving capitalJournal of Finance 65 1238
Duffie, DarrellGarleanu, NicolaePedersen, Lasse Heje 2005 Over-the-counter marketsEconometrica 73 1815
Duffie, DarrellGarleanu, NicolaePedersen, Lasse Heje 2007 Valuation in over-the-counter marketsReview of Financial Studies 20 1865
Easley, DavidHvidkjaer, SoerenO’Hara, Maureen 2002 Is information risk a determinant of asset returnsJournal of Finance 57 2185
Easley, DavidO’Hara, Maureen 2004 Information and the cost of capitalJournal of Finance 59 1553
Fama, Eugene FFrench, Kenneth R 1993 Common risk factors in the returns on stocks and bondsJournal of Financial Economics 33 3
Fang, Vivian WNoe, Thomas HTice, Sheri 2009 Stock market liquidity and firm valueJournal of Financial Economics 94 150
Frazzini, AndreaPedersen, Lasse Heje 2010
Frazzini, AndreaPedersen, Lasse Heje 2011
Garleanu, NicolaePedersen, Lasse Heje 2004 Adverse selection and the required returnReview of Financial Studies 17 643
Garleanu, NicolaePedersen, Lasse Heje 2011 Margin-based asset pricing and deviations from the law of one priceReview of Financial Studies 24 1980
Geyer, AloisZiemba, William T 2008 The Innovest Austrian pension fund financial planning model InnoALMOperations Research 56 797
Glosten, Lawrence RMilgrom, Paul R 1985 Bid, ask and transaction prices in a specialist market with heterogeneously informed tradersJournal of Financial Economics 14 71
Hasbrouck, Joel 2009 Trading costs and returns for U.. equities: Estimating effective costs from daily dataJournal of Finance 64 1445
Hund, JohnLesmond, David A 2008
Ivashina, Victoria 2010 Bank lending during the financial crisis of 2008Journal of Financial Economics 97 319
Jain, Pankaj K 2005 Financial market design and the equity premium: Electronic versus floor tradingJournal of Finance 60 2955
Kessler, StephanScherer, Bernd 2011 Hedge fund return sensitivity to global liquidityJournal of Financial Markets 14 301
Kirilenko, AndreiKyle, Albert SSamadi, MekrdadTuzum, Tugkan 2011 The Flash Crash: The impact of high frequency trading on an electronic marketWorking paper
Kyle, Albert S 1985 Continuous auctions and insider tradingEconometrica 53 1315
Lesmond, David AOgden, Joseph PTrzcinka, Charles A 1999 A new estimate of transaction costsReview of Financial Studies 12 1113
Lin, HaiWang, JunboWu, Chunchi 2011 Liquidity risk and expected corporate bond returnsJournal of Financial Economics 99 628
Liu, Weimin 2006 A liquidity-augmented capital asset pricing modelJournal of Financial Economics 82 631
Loderer, ClaudioRoth, Lukas 2005 The pricing discount for limited liquidity: Evidence from SWX Swiss Exchange and the NasdaqJournal of Empirical Finance 12 239
Longstaff, Francis A 1995 How much can marketability affect security valuesJournal of Finance 50 1767
Longstaff, Francis AMithal, SanjayNeid, Eric 2005 Corporate yield spreads: Default risk or liquidity? New evidence from the credit default swap marketJournal of Finance 60 2213
Malaby, Sebastian 2010 More Money Than GodThe Penguin PressNew York
Menselson, Haim 1982 Market behavior in a clearing houseEconometrica 50 1505
Mendelson, Haim 1985 Random competitive exchange: Price distributions and gains from tradeJournal of Economic Theory 37 254
Muscarella, Chris JPiwowar, Michael S 2001 Market microstructure and securities values: Evidence from the Paris BourseJournal of Financial Markets 4 209
Naes, RandiOdegaard, Bernt Arne 2009 Liquidity and Asset Pricing: Evidence on the role of investor holding periodWorking paper
Nashikkar, AmrutSubrahmanyam, MartiMahanti, Sriketan 2011 Liquidity and arbitrage in the market for credit riskJournal of Financial and Quantitative Analysis 46 627
Pastor, LubosStambaugh, Robert F 2003 Liquidity risk and expected stock returnsJournal of Political Economy 111 642
Pedersen, Lasse Heje 2009 When everyone runs for the exitInternational Journal of Central Banking 5 177
Reinhart, Carmen MRogoff, Kenneth S 2009 This Time Is Different: Eight Centuries of Financial FollyPrinceton University PressPrinceton, NJ
Sadka, Ronnie 2011 Hedge-fund performance and liquidity riskJournal of Investment Management
Silber, William L 1991 Discounts on restricted stocks: The impact of illiquidity on stock pricesFinancial Analysts Journal 47 60
Watanabe, AkikoWatanabe, Masahiro 2008 Time-varying liquidity risk and the cross section of stock returnsReview of Financial Studies 21 2449
Ziemba, Rachel E.SZiemba, William T 2007 Scenarios for Risk Management and Global Investment StrategiesEnglandJohn Wiley & Sons

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