Asset Liquidity and Indivisibility

Han Han, Benoit Julien, Asgerdur Petursdottir, Liang Wang

Research output: Contribution to journalArticle

Abstract

We study asset liquidity in a search-theoretic framework where divisible assets can facilitate exchange for an indivisible consumption good. The distinctive characteristics of our theory are that the asset dividend can be either positive or negative and buyers can choose whether or not to carry the asset and trade for the indivisible good. Buyers’ participation determines the demand for asset liquidity. Thus, the asset price carries a liquidity premium component which reflects the function of the asset in facilitating trade. The economy features multiple equilibria when the asset dividend is negative, due to the trade-off between the probability of trade and the endogenous cost of holding assets.
Original languageEnglish
Pages (from-to)236-250
Number of pages15
JournalEuropean Economic Review
Volume119
Early online date30 Jul 2019
DOIs
Publication statusPublished - 1 Oct 2019

Keywords

  • Asset
  • Indivisibility
  • Liquidity
  • Search

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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