Market Liquidity

Asset Pricing, Risk, and Crises

Business & Finance, Economics, Macroeconomics, Finance & Investing, Finance
Cover of the book Market Liquidity by Yakov Amihud, Haim Mendelson, Lasse Heje Pedersen, Cambridge University Press
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Author: Yakov Amihud, Haim Mendelson, Lasse Heje Pedersen ISBN: 9781139563840
Publisher: Cambridge University Press Publication: November 12, 2012
Imprint: Cambridge University Press Language: English
Author: Yakov Amihud, Haim Mendelson, Lasse Heje Pedersen
ISBN: 9781139563840
Publisher: Cambridge University Press
Publication: November 12, 2012
Imprint: Cambridge University Press
Language: English

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.

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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.

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