Money and asset prices with uninsurable risks

We present a theory of differences of liquidity across assets, based on an endogenous ranking of assets as media of exchange arising from their relative quality as hedging devices. When assets have two distinct roles, as intertemporal media of exchange and hedging devices, buyers have generically a strict preference for paying sellers with the asset which is the relative better hedging device for sellers. The consequence of this preference is that there are three monetary policy regimes, and these regimes differ in which assets serve as media of exchange, whether assets carry a liquidity premium, and in the impact that monetary policy has on asset prices.     

Derivative Pricing with Liquidity Risk: Theory and Evidence from the Credit Default Swap Market

We derive an equilibrium asset pricing model incorporating liquidity risk, derivatives, and short‐selling due to hedging of nontraded risk. We show that illiquid assets can have lower expected returns if the short‐sellers have more wealth, lower risk aversion, or shorter horizon. The pricing of liquidity risk is different for derivatives than for positive‐net‐supply assets, and depends on investors' net nontraded risk exposure. We estimate this model for the credit default swap market. We find strong evidence for an expected liquidity premium earned by the credit protection seller. The effect of liquidity risk is significant but economically small.     

Search Costs,Behavioral Biases,and Information Intermediary Effects

In many markets, buyers, sellers, and their agents have differential information about the quality of heterogeneous assets. We study negotiated transaction prices in the commercial real estate market, which is characterized by heterogeneous assets, illiquidity, and highly segmented local markets, all of which increase the importance of asymmetric information in negotiated pricing outcomes. Using 114,588 industrial, multi-family and office sale transactions that occurred during 1997–2011, we document that distant commercial real estate buyers pay, on average, premiums of 4 % to 15 % relative to local buyers, controlling for individual property characteristics as well as time fixed-effects. We also examine the extent to which the sources of these observed premiums are a product of higher search costs/information asymmetry problems associated with distance (search cost channel) or a result of reference-dependence preference/anchoring based on the price levels in the investors’ local market (behavioral biases channel). Our results suggest the observed price premiums are explained by distant investors who face higher search costs and are at an information disadvantage compared to investors located in closer proximity to the property. In contrast, anchoring plays a more muted role in explaining observed premiums. The use of an intermediary (broker) increases, on average, the acquisition prices of buyers and decreases the disposition prices of sellers by 3 % to 8 %. This result is consistent with the incentive real estate agents have to convince sellers to dispose of their properties too quickly and to convince buyers to search less and therefore pay higher prices.     

Information and Liquidity

We study how recognizability affects assets’ acceptability, or liquidity. Some assets, like U.S. currency, are readily accepted because sellers can easily recognize their value, unlike stock certificates, bonds or foreign currency, say. This idea is common in monetary economics, but previous models deliver equilibria where less recognizable assets are always accepted with positive probability, never probability 0. This is inconvenient when prices are determined through bargaining, which is difficult with private information. We construct models where agents reject outright assets that they cannot recognize, at least for some parameters. Thus, information frictions generate liquidity differences without overly complicating the analysis.     

Self‐Fulfilling Liquidity Dry‐Ups

I analyze a model in which holding cash imposes a negative externality: it worsens future adverse selection in markets for long‐term assets, which impairs their role for liquidity provision. Adverse selection worsens when potential sellers of long‐term assets hold more cash because then fewer sales reflect cash needs, and proportionally more sales reflect private information. Moreover, future market illiquidity makes current cash holding more appealing. This feedback effect may result in hoarding behavior and a market breakdown, which I interpret as a self‐fulfilling liquidity dry‐up. This mechanism suggests that imposing liquidity requirements on financial institutions may backfire.     

Asset liquidity,corporate investment,and endogenous financing costs

We analyze how the liquidity of real and financial assets affects corporate investment. The trade-off between liquidation costs and underinvestment costs implies that low-liquidity firms exhibit negative investment sensitivities to liquid funds, whereas high-liquidity firms have positive sensitivities. If real assets are not divisible in liquidation, firms with high financial liquidity optimally avoid external financing and instead cut new investment. If real assets are divisible, firms use external financing, which implies a lower sensitivity. In addition, asset redeployability decreases the investment sensitivity. Our findings demonstrate that asset liquidity is an important determinant of corporate investment.     

Liquidity provision,interest rates,and unemployment

The effective liquidity supply of the economy—the weighted-sum of all assets that serve as media of exchange—matters for interest rates and unemployment. We formalize this idea by adding an over-the-counter market with collateralized trades to the Mortensen–Pissarides model. An increase in public liquidity through a higher supply of real government bonds raises the real interest rate, crowding out private liquidity and increasing unemployment. If unemployment is inefficiently high, keeping liquidity scarce can be socially optimal. A liquidity crisis affecting the acceptability of private assets as collateral widens the rate-of-return difference between private and public liquidity, also increasing unemployment.     

Financial intermediation and the supply of liquidity

I study the role of financial intermediaries in supplying liquidity to the real economy. Firms hold liquid assets to meet unanticipated expenses. Financial intermediaries supply liquidity by pooling partially liquid assets, but their ability to commit future funds depends on their capital. When liquidity is scarce, there is a positive liquidity premium and investment is inefficiently low. Bank losses raise the liquidity premium and reduce investment. I analyze the optimal supply of public liquidity and find that when private liquidity is scarce the government should issue bonds for their liquidity properties, providing justification for countercyclical budget deficits.     

Liquidity Risk of Private Assets: Evidence from Real Estate Markets

Investment in thinly traded private assets involves liquidity risk. Existing literature provides limited guidance as it mainly focuses on publicly traded security assets such as stocks and bonds. This paper develops an analytical tool for quantifying liquidity risk of private assets. Using commercial real estate as a model asset and under reasonable assumptions, we find that the magnitude of liquidity risk is too large to be ignored, especially in down markets when liquidity risk is a great concern.     

Cash holdings and real asset liquidity

This paper examines the relationship between the ability of a firm to sell its real assets and its cash holdings behavior. A substitution effect exists between the size of cash balances and the liquidity of a firm’s real assets when access to external capital markets is limited. Among financially constrained firms, higher asset liquidity is related to lower cash holdings. Additionally for financially constrained firms, the market value of cash is lower for firms with higher asset liquidity.     

Liquidity,Maturity, and the Yields on U.S. Treasury Securities

The effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than 6 months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between notes and bills is a decreasing and convex function of the time to maturity. The results provide a robust confirmation of the liquidity effect in asset pricing.     

What’s wrong with Pittsburgh? Delegated investors and liquidity concentration

What makes an asset institutional quality? This paper proposes that one reason is the existing concentration of delegated investors in a market through a liquidity channel. Consistent with this intuition, it documents differences in investor composition across US cities and shows that delegated investors concentrate their investments in cities with higher turnover. It then estimates a search model showing how heterogeneity in liquidity preferences makes some markets more liquid, even when assets have identical cash flows. The paper provides evidence for clientele equilibria arising in frictional asset markets and suggests that a liquidity channel may explain divergent paths in city development.     

流动性幻觉与高杠杆率之谜

本文研究信用货币体系下流动性不足导致的过度投资和高杠杆率问题。文章将货币引入到消费者与银行互动的三期经济框架中,构建信用货币体系下的偏好冲击与流动性冲击模型,阐明消费者的购买力、经济投资效率和杠杆率都在一定程度上取决于流动性背后的价值支撑,而非仅由流动性的名义数量决定。本文指出,流动性的价值支撑主要体现为央行储备资产和政府财政收入,其水平决定了经济体系内短期消费的支付能力,流动性的价值支撑不足会导致过度投资和高杠杆率。进一步基于中国数据的实证分析验证了理论模型的主要结论。本文研究结果提示,在经济双循环体系下,货币政策与财政政策的协调配合尤为重要,维持央行储备资产规模并保持合理税率水平可以缓解流动性的价值支撑不足和高杠杆率问题。     

Leverage,governance and wealth effects of asset purchasers

We examine a sample of 670 firms that announce asset purchases. We hypothesize that buyer announcement returns should be higher in the presence of better monitoring and better governance. Consistent with the monitoring hypothesis, we find that buyers with higher private debt make purchase decisions that increase shareholder value. Consistent with the governance hypothesis, we find that returns are higher for buyers that have lower antitakeover provisions in place. Consistent with the managerial discretion hypothesis, buyer announcement-period returns increase with buyer leverage. Consistent with the liquidity hypothesis, we find that announcement-period returns decrease with the seller's Z-score, suggesting that buyers benefit from the lower liquidity of assets sold by sellers with lower debt capacity and higher financial distress. We also find that buyer announcement-period returns are directly related to their operating performance in the post-purchase year.     

Access to bank financing and the collateral channel: The case of Tunisian firms before and after the revolution

This article is aimed to study the impact of collateral liquidity on debt-access. Such an effect is proven with regard to the difficult economic conditions which ensued from the Tunisian revolution in 2011. The results show that the previously acquired liquid assets enhance debt access. This result is realized by a first measure through the positive relationship between inventories and short term debt and between fixed assets and long term debt. A second measure highlights the positive effect of lands, buildings, machineries and equipments and the negative effect of other fixed assets on debt-access. After the revolution, the creditors lowered their lending to firms to deal with liquidity shocks in the monetary market. Also, they became more selective through their excessive demand for liquid collateral. This result is justified by the intensive effect of real estate assets (lands and buildings) and by the regressive effect of the movable assets (machineries, equipments and other fixed assets).     

Liquidity mergers

We study the interplay between corporate liquidity and asset reallocation. Our model shows that financially distressed firms are acquired by liquid firms in their industries even in the absence of operational synergies. We call these transactions “liquidity mergers,” since their purpose is to reallocate liquidity to firms that are otherwise inefficiently terminated. We show that liquidity mergers are more likely to occur when industry-level asset-specificity is high and firm-level asset-specificity is low. We analyze firms' liquidity policies as a function of real asset reallocation, examining the trade-offs between cash and credit lines. We verify the model's prediction that liquidity mergers are more likely to occur in industries in which assets are industry-specific, but transferable across firms. We also show that firms are more likely to use credit lines (relative to cash) in industries in which liquidity mergers are more frequent.     

Bank liabilities channel

The financial intermediation sector is important not only for channeling resources from agents in excess of funds to agents in need of funds (lending channel). By issuing liabilities it also creates financial assets held by other sectors of the economy for insurance or liquidity purpose. When the intermediation sector creates less liabilities or their value falls, agents are less willing to engage in activities that are individually risky but desirable in aggregate (bank liabilities channel). The paper shows how financial crises driven by self-fulfilling expectations about the liquidity of the banking sector are transmitted to the real sector of the economy. Since the government could also create financial assets by borrowing, the paper analyzes how public debt affects the issuance of liabilities by the financial intermediation sector.     

The Cost of Short‐Selling Liquid Securities

Standard models of liquidity argue that the higher price for a liquid security reflects the future benefits that long investors expect to receive. We show that short‐sellers can also pay a net liquidity premium if their cost to borrow the security is higher than the price premium they collect from selling it. We provide a model‐free decomposition of the price premium for liquid securities into the net premiums paid by both long investors and short‐sellers. Empirically, we find that short‐sellers were responsible for a substantial fraction of the liquidity premium for on‐the‐run Treasuries from November 1995 through July 2009.     

Agency and brokerage of real assets in competitive equilibrium

Brokerage contracts for many categories of real assets are characterizedby a common, constant commission rate payable upon sale, exclusiveagency, and contractual asking prices. For a large market insteady state, these conventional contracts produce in equilibriumno agency problem between a broker and his clients. Each brokerspends the same time or effort selling each client's asset asthe broker would spend on his own assets. As in standard agencyproblems, extra effort by a broker generates first-order stochasticallydominant distributions of bids by potential buyers. Unlike standardagency problems, each broker can allocate his time or effortbetween selling the assets of his multiple clients and searchingfor new clients in competition with other brokers. Because brokers'time spent searching for new sellers is dissipative, entry bybrokers is excessive in equilibrium.     

基于资产期限结构的流动性过剩的内涵、测度与因子分析

本文基于资产期限结构探讨了流动性过剩的内涵,并对流动性过剩进行了定量测度和因子分析,在此基础上,提出了流动性过剩的管理思路与策略。基于资产期限结构的流动性过剩可以分解为一期滞后流动性过剩、货币期限结构与均衡比例期限升水变化率三个因子,实证分析结果表明,三个因子的均衡值均呈现季度循环的特征。中央银行应明确流动性过剩的下限和上限,在同一年度内应采取流动性管理策略保持流动性稳定提高,在不同年度应保持高流动性过剩与低流动性过剩之间的转换。为实现流动性过剩季度循环的均衡路径并使其保持在上下限范围内,中央银行可以选择流动性管理工具依据季度循环的特征调控货币期限结构与均衡比例期限升水。