We study a model with heterogeneous producers that face collateral and cash in advance constraints. These two frictions give rise to a non-trivial financial market in a monetary economy. A tightening of the collateral constraint results in a credit-crunch generated recession. The model can suitable be used to study the effects on the main macroeconomic variables and on welfare of each individua...

We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a “veil” and trade vani...

Hayashi and Prescott (2002) speculate that the anemic performance of the Japanese economy since the early 1990s can be understood in terms of how any ‘well-functioning’ private sector might react to an exogenous ‘productivity shock.’ In particular, they downplay the role of monetary and financial factors in shaping Japan’s ‘lost decade.’ But many view the monetary and financial developments in ...

We show that idiosyncratic liquidity risk is positively priced in the cross-section of stock returns. Our measure of idiosyncratic liquidity volatility is based on a ”market” model for stock liquidity. Idiosyncratic volatility of liquidity is priced in the presence of systematic liquidity risk: the covariance of stock returns with aggregate liquidity, the covariance of stock liquidity with aggr...

We explore a new dimension of fund managers' timing ability by examining whether they can time market liquidity through adjusting their portfolios'market exposure as aggregate liquidity conditions change. Using a large sample of hedge funds, we find strong evidence of liquidity timing. A bootstrap analysis suggests that top-ranked liquidity timers cannot be attributed to pure luck. In out-of-sa...

Article history: Received 19 July 2012 Received in revised form 21 November 2013 Accepted 28 November 2013 Available online 7 December 2013 We investigate the pricing implication of liquidity risks in the liquidity-adjusted capital asset pricing model of Acharya and Pedersen (2005), using multiple liquidity measures and their principal component. While we find that the empirical results are sen...

We document a positive relation between the volatility of liquidity and expected returns. Our measure of liquidity is based on Amihud (2002) and its volatility is measured using daily data. We show that the volatility of liquidity effect is different from previously documented liquidity risks: the covariance of stock returns with aggregate liquidity, the covariance of stock liquidity with aggre...

We present an empirical study of the pricing effect of liquidity in the credit default swaps (CDS) market. We construct liquidity proxies to capture various facets of CDS liquidity including adverse selection, search frictions, and inventory costs. We show that the liquidity effect on CDS spreads is significant with an estimated liquidity premium on par with those of Treasury bonds and corporat...

entral banks provide liquidity in various contexts to promote the stability and efficient functioning of the financial system. While the exact institutional aspects of liquidity provision vary among central banks, some basic features seem to be generic. First, the provision of central bank liquidity in normal periods is restricted to a small subset of possible agents who are encouraged to compe...