Money is both the medium for transaction and most liquid asset banks. We examine roles of money in an integrated framework, where banks are subject to aggregate illiquidity risk. An active central bank can replicate constrained efficient allocation, which, however, cannot be implemented market equilibrium: due moral hazard problems, invest excessively illiquid assets, forcing provide liquidity ...

Employing a new proxy for liquidity, this paper examines its impact on stock returns in the context of the Fama-French framework. We augment the Carhart four-factor model with a liquidity factor and employ individual and system regression techniques. Using an extensive dataset drawn from the Australian equities market, we find a significant illiquidity premium and evidence that liquidity explai...

This paper analyzes a two-good version of the Diamond and Dybvig model in a small open economy. This structure is used to analyze the interaction between banks as liquidity insurers, real exchange rates and monetary policies. With ...xed exchange rates and local lender of last resort, non-tradeables price de‡ation is necessary for existence as well as for implementation. Conditions for currency...

A utility maximization problem in an illiquid market is studied. The financial market is assumed to have temporary price impact with finite resilience. After the formulation of this problem as a Markovian stochastic optimal control problem a dynamic programming approach is used for its analysis. In particular, the dynamic programming principle is proved and the value function is shown to be the...

Information spillover and liquidity externality across securities is of practical importance to both practitioners and policy makers. We empirically examine how information spillover facilitates liquidity externalities between the equity and corporate bond markets. An event study was conducted by comparing the change of liquidity of stocks whose corporate bonds are TRACE-eligible with that of n...

Abstract We study risk-sharing economies where heterogeneous agents trade subject to quadratic transaction costs. The corresponding equilibrium asset prices and trading strategies are characterised by a system of nonlinear, fully coupled forward–backward stochastic differential equations. show that unique solution exists provided the agents’ preferences sufficiently similar. In benchmark specif...

We study how 3,534 beneficiaries of PROSPERA, Mexico's cash transfer program, smooth food consumption around the payday, an anticipated and transitory income shock. find that security do not change including for recipients with impatient or time-inconsistent preferences households higher than median dependence. Conversely, health employment shocks (unexpected less changes) reduce security. The ...