TY  - JOUR
AU  - Huang,Jennifer
AU  - Wang,Jiang
TI  - Liquidity and Market Crashes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14013
PY  - 2008
Y2  - May 2008
UR  - http://www.nber.org/papers/w14013
L1  - http://www.nber.org/papers/w14013.pdf
N1  - Author contact info:
 jennifer_huang
Department of Finance, B6600
Red McCombs School of Business
University of Texas at Austin
Austin, TX 78712

Jiang Wang
MIT Sloan School of Management
100 Main Street, E62-614
Cambridge, MA 02142
Tel: 617/253-2632
Fax: 617/258-6855
E-Mail: wangj@mit.edu
AB  - In this paper, we develop an equilibrium model for stock market liquidity and its impact on asset prices when constant market presence is costly.  We show that even when agents' trading needs are perfectly matched, costly market presence prevents them from synchronizing their trades and hence gives rise to endogenous order imbalances and the need for liquidity.  Moreover, the endogenous liquidity need, when it occurs, is characterized by excessive selling of significant magnitudes.  Such liquidity-driven selling leads to market crashes in the absence of any aggregate shocks.  Finally, we show that illiquidity in the market leads to high expected returns, negative and asymmetric return serial correlation, and a positive relation between trading volume and future returns.  We also propose new measures of liquidity based on its asymmetric impact on prices and demonstrate a negative relation between these measures and expected stock returns.
ER  -