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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Liquidity and Selection in Asset Markets with Search Frictions

Vol.23, No.2, June , 113–142



  •   (Yonsei University)

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Abstract  

I construct a model of an asset market subject to search frictions, in an environment where both asset liquidity and market composition are determined endogenously. The analysis predicts that higher asset prices resulting from exogenously higher asset earnings imply: (i) a shorter search duration for sellers (higher liquidity), (ii) a shorter owner tenure before listing assets for resale (turnover), (iii) a higher stock of buyers, and (iv) a higher share of the asset stock traded (trade volume). Asset price-earnings ratios respond positively to earnings because liquidity premia respond to the size of earnings relative to the costs of search. I show that liquidity effects and selection effects reinforce each other in the presence of search frictions.


Keywords
   liquidity, selection, asset market, search

JEL classification codes
   G1, D83, R31
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