2,194 research outputs found

    Liquidity Premia in Dynamic Bargaining Markets

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    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 market capitalization available for sale. This suggests that the free float is an appropriate measure of liquidity, consistent with the linear specifications commonly estimated in the empirical literature.The qualitative predictions of the model corroborate much of the empirical evidence

    Valuation in Over-the-Counter Markets

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    We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then "recover" over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.

    Wage structure effects of international trade: Evidence from a small open economy

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    In the last few decades, international trade has expanded not only between industrialised countries, but also between high- and low-wage countries. This important change has raised questions on how international trade affects the labour market. In this spirit, this paper aims to investigate the impact of international trade on wage dispersion in a small open economy. It is one of the few to: i) use detailed matched employer-employee data to compute industry wage premia and disaggregated industry level panel data to examine the impact of changes in exports and imports on changes in wage differentials, ii) analyse the impact of imports according to the country of origin. Looking at the export side, we find a positive effect of exports on the industry wage premium. The findings also show that import penetration from low-income countries has a significant and negative impact on inter-industry wage differentials, while imports from high-income countries seem to have a more ambiguous impact on the wage structure. The results suggest that trade with low-income and high-income countries has different effects on inter-industry wage differentials.wage structure, inter-industry wage differentials, international trade, matched employer-employee data

    Inter-industry wage differentials in EU countries : What do cross-country time-varying data add to the picture ?

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    This paper documents the existence of inter-industry wage differentials across a large number of industries for eight EU countries (Belgium, Germany, Greece, Hungary, Ireland, Italy, the Netherlands and Spain) at two different points in time (in general, 1995 and 2002). It then looks into possible explanations for the main patterns observed. The analysis uses the European Structure of Earnings Survey (SES), an internationally-harmonised matched employer-employee dataset, to estimate inter-industry wage differentials conditional on a rich set of employee, employer and job characteristics. After investigating the possibility that unobservable employee characteristics lie behind the conditional wage differentials, a hypothesis which cannot be accepted, the paper considers the role of institutional features, as well as industry structure and performance in explaining inter-industry wage differentials. The results suggest that inter-industry wage differentials are consistent with rent-sharing mechanisms and that rent-sharing is more likely in industries with firm-level collective agreements and with higher collective agreement coverageinter-industry wage differentials, rent sharing, unobserved ability

    Liquidity in frictional asset markets

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    On November 14-15, 2008, the Federal Reserve Bank of Cleveland hosted a conference on “Liquidity in Frictional Asset Markets.” In this paper we review the literature on asset markets with trading frictions in both finance and monetary theory using a simple search-theoretic model, and we discuss the papers presented at the conference in the context of this literature. We will show the diversity of topics covered in this literature, e.g., the dynamics of housing and credit markets, the functioning of payment systems, optimal monetary policy and the cost of inflation, the role of banks, the effect of informational frictions on asset trading.Liquidity (Economics)

    Liquidity and asset market dynamics

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    We study economies with an essential role for liquid assets in transactions. The model can generate multiple stationary equilibria, across which asset prices, market participation, capitalization, output and welfare are positively related. It can also generate a variety of nonstationary equilibria, even when fundamentals are deterministic and time invariant, including periodic, chaotic, and stochastic (sunspot) equilibria with recurrent market crashes. Some equilibria have asset price trajectories that resemble bubbles growing and bursting. We also analyze endogenous private and public liquidity provision. Sometimes it is efficient to have enough liquid assets to satiate demand; other times it is not.Liquidity (Economics) ; Asset pricing

    Asset prices and liquidity in an exchange economy

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    I develop an asset-pricing model in which financial assets are valued for their liquidity - the extent to which they are useful in facilitating exchange - as well as for being claims to streams of consumption goods. The implications for average asset returns, the equity-premium puzzle and the risk-free rate puzzle, are explored in a version of the model that nests the work of Mehra and Prescott (1985).Asset pricing ; Liquidity (Economics)

    Liquidity and the threat of fraudulent assets

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    We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset’s resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.Liquidity (Economics) ; Fraud ; Asset pricing

    What determines euro area bank CDS spreads ?

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    This paper decomposes the explained part of the CDS spread changes of 31 listed euro area banks according to various risk drivers. The choice of the credit risk drivers is inspired by the Merton (1974) model. Individual CDS liquidity and other market and business variables are identified to complement the Merton model and are shown to play an important role in explaining credit spread changes. Our decomposition reveals, however, highly changing dynamics in the credit, liquidity, and business cycle and market wide components. This result is important since supervisors and monetary policy makers extract different signals from liquidity based CDS spread changes than from business cycle or credit risk based changes. For the recent financial crisis, we confirm that the steeply rising CDS spreads are due to increased credit risk. However, individual CDS liquidity and market wide liquidity premia played a dominant role. In the period before the start of the crisis, our model and its decomposition suggest that credit risk was not correctly priced, a finding which was correctly observed by e.g. the International Monetary Fundcredit default spreads, credit risk, financial crisis, financial sector, liquidity premia, structural model

    A Search-Based Theory of the On-the-Run Phenomenon

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    Treasury Market, Liquidity, Search
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