This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return–illiquidity relationship. Also, stock returns are negatively related over time to contemporaneous unexpected illiquidity. The illiquidity measure here is the average across stocks of the daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firm stocks, thus explaining time series variations in their premiums over

Abstract not found

Macroeconomic models of nominal exchange rates perform poorly. The proportion of monthly exchange rate changes that these models can explain is essentially zero. Ths paper presents

This paper analyzes the incentives of large shareholders to monitor public corporations. We investigate the hypothesis that a liquid stock market reduces large shareholders’ incentives to monitor because it allows them to sell their stocks more easily. Even though this is true, a liquid market also makes it less costly to hold larger stakes and easier to purchase additional shares. We show that this fact is important if monitoring is costly: market liquidity mitigates the problem that small shareholders free ride on the effort of the large shareholder. We find that liquid stock markets are beneficial because they make corporate governance more effective. IS A LIQUID STOCK MARKET a liability for effective corporate governance? Casual empiricism seems to suggest that a liquid market allows investors to sell out if they receive adverse information about a company, and that, by contrast, a less liquid market forces them to hold on to their investment and to use their votes to influence the company to achieve better returns. A typical example is British Airways ’ experience, when its senior management came under attack for using unfair competitive practices against one of its smaller rivals, Virgin Atlantic. At the time, the Financial Times noted that Fidelity, the second largest shareholder with a holding of 4.5 percent, “has disposed of almost its entire position, and the Prudential and Standard Life stakes have

Traditionally and understandably, the microscope of market microstructure has focused on attributes of single assets. Little theoretical attention and virtually no empirical work has been devoted to common determinants of liquidity nor to their empirical manifestation, correlated movements in liquidity. But a wider-angle lens exposes an imposing image of commonality. Quoted spreads, quoted depth, and effective spreads co-move with market- and industry-wide liquidity. After controlling for wellknown individual liquidity determinants, such as volatility, volume, and price, common influences remain signi"cant and material. Recognizing the existence of commonality is a key to uncovering some suggestive evidence that inventory risks and asymmetric information both affect intertemporal changes in liquidity.

We model a dynamic limit order market as a stochastic sequential game. Since the model is analytically intractable, we provide an algorithm based on Pakes and McGuire (2001) to find a stationary Markov-perfect equilibrium. Given the stationary equilibrium, we generate artificial time series and perform comparative dynamics. As we know the data generating process, we can compare transaction prices to the true value of the asset, as well as explicitly determine the welfare gains accruing to investors.

Abstract not found

Abstract not found

Spreads, depths, and trading activity for U.S. equities are studied over an extended time sample. Daily changes in market averages of liquidity and trading activity are highly volatile, negatively serially dependent, and influenced by a variety of factors. Liquidity plummets significantly in down markets but increases weakly in up markets. Trading activity increases in either up or down markets. Recent market volatility induces less trading activity and reduces spreads. There are strong day-of-the-week effects; Fridays are relatively sluggish and illiquid while Tuesdays are the opposite. Long- and shortterm interest rates influence liquidity and trading activity. Depth and trading activity increase just prior to major macroeconomic announcements.

We study how intermediation and asset prices in over-the-counter markets are affected by illiquidity associated with search and bargaining. We compute explicitly the prices at which investors trade with each other, as well as marketmakers ’ bid and ask prices in a dynamic model with strategic agents. Bid-ask spreads are lower if investors can more easily find other investors, or have easier access to multiple marketmakers. With a monopolistic marketmaker, bid-ask spreads are higher if investors have easier access to the marketmaker. We characterize endogenous search and welfare, and discuss empirical implications. ∗Part of this paper was previously distributed under the title “Valuation in Dynamic Bargaining Markets. ” We are grateful for conversations with Yakov Amihud, Helmut