NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Liquidity as Social Expertise

Pablo Kurlat

NBER Working Paper No. 21118
Issued in April 2015
NBER Program(s):The Asset Pricing Program, The Economic Fluctuations and Growth Program

This paper proposes a theory of liquidity dynamics. Illiquidity results from asymmetric information. Observing the historical track record teaches agents how to interpret public information and helps overcome information asymmetry. There can be an illiquidity trap: too much asymmetric information leads to the breakdown of trade, which interrupts learning and perpetuates illiquidity. Liquidity falls in response to unexpected events that lead agents to question their valuation models, especially in newer markets, may be slow to recover after a crisis and is higher in periods of stability.

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Document Object Identifier (DOI): 10.3386/w21118

Published: KURLAT, P. (2018), Liquidity as Social Expertise. The Journal of Finance, 73: 619-656. doi:10.1111/jofi.12606

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