Market Liquidity
Asset Pricing, Risk, and Crises

This book explores the effect of liquidity on asset prices, liquidity variations over time and how liquidity risk affects prices.

Yakov Amihud (Author), Haim Mendelson (Author), Lasse Heje Pedersen (Author)

9780521139656, Cambridge University Press

Paperback, published 12 November 2012

292 pages, 32 b/w illus. 27 tables
22.9 x 1.7 x 15.2 cm, 0.43 kg

'The authors have made substantial contributions in microstructure, and especially in the understanding of liquidity, for years. This collection of their best articles on liquidity is particularly timely given the growing realization of the macro pathology caused by a financial-crisis-induced recession. They present strong evidence that a liquidity spiral hurts post-recession real investment.' David Whitcomb, author of Securities Market Microstructure and Founder, Automated Trading Desk

This book presents the theory and evidence on the effect of market liquidity and liquidity risk on asset prices and on overall securities market performance. Illiquidity means incurring a high transaction cost, which includes a large price impact when trading and facing a long time to unload a large position. Liquidity risk is higher if a security becomes more illiquid when it needs to be traded in the future, which will raise trading cost. The book shows that higher illiquidity and greater liquidity risk reduce securities prices and raise the expected return that investors require as compensation. Aggregate market liquidity is linked to funding liquidity, which affects the provision of liquidity services. When these become constrained, there is a liquidity crisis which leads to downward price and liquidity spiral. Overall, the volume demonstrates the important role of liquidity in asset pricing.

Introduction Yakov Amihud, Haim Mendelson and Lasse Heje Pedersen
Part I. Liquidity: The Effect of Trading Costs on Securities Prices and Returns: 1. Asset pricing and the bid-ask spread Yakov Amihud and Haim Mendelson
2. Liquidity, maturity, and the yield on US Treasury securities Yakov Amihud and Haim Mendelson
3. Market microstructure and securities values: evidence from the Tel Aviv stock exchange Yakov Amihud, Haim Mendelson and Beni Lauterbach
Part II. Liquidity Risk: 4. Illiquidity and stock returns: cross-section and time-series effects Yakov Amihud
5. Asset pricing with liquidity risk Viral V. Acharya and Lasse Heje Pedersen
Part III. Liquidity Crises: 6. Market liquidity and funding liquidity Markus Brunnermeier and Lasse Heje Pedersen
7. Liquidity and the 1987 stock market crash Yakov Amihud, Haim Mendelson and Robert A. Wood
8. Slow moving capital Mark Mitchell, Lasse Heje Pedersen and Todd Pulvino.

Subject Areas: Business strategy [KJC], Banking [KFFK], Finance [KFF], Economic & financial crises & disasters [KCX], Economic statistics [KCHS], Econometrics [KCH], Macroeconomics [KCB], Economics [KC]