NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Liquidity and Market Structure

Sanford J. Grossman, Merton H. Miller

NBER Working Paper No. 2641 (Also Reprint No. r1117)
Issued in July 1988
NBER Program(s):   ME

Market liquidity is modeled as being determined by the demand and supply of immediacy. Exogenous liquidity events coupled with the risk of delayed trade create a demand for immediacy. Market makers supply immediacy by their continuous presence. and willingness to bear risk during the time period between the arrival of final buyers and sellers. In the long run the number of market makers adjusts to equate the supply and demand for immediacy. This determine the equilibrium level of liquidity in the market. The lower is the autocorrelation in rates of return, the higher is the equilibrium level of liquidity.

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Document Object Identifier (DOI): 10.3386/w2641

Published: Journal of Finance, Vol. XLIII, No. 3, (July 1988), pp. 617-637. citation courtesy of

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