Liquidity as Social Expertise
Working Paper 21118
DOI 10.3386/w21118
Issue Date
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.
Published Versions
KURLAT, P. (2018), Liquidity as Social Expertise. The Journal of Finance, 73: 619-656. doi:10.1111/jofi.12606 citation courtesy of