This paper examines the relation between liquidity demands of corporate sector and investment decisions. It shows that the liquidity asset holding has two impacts on investments. First, the liquidity can absorb a liquidity shock and helps to continue a necessary project. Second, it helps to continue an undesirable project and decreases the incentive of firms. This negative aspect is quite simil...

We develop a model of financially constrained arbitrage, and use it to study the dynamics of arbitrage capital, liquidity, and asset prices. Arbitrageurs exploit price discrepancies between assets traded in segmented markets, and in doing so provide liquidity to investors. A collateral constraint limits their positions as a function of capital. We show that the dynamics of arbitrage activity ar...

Equity price is cyclical and often leads the business cycle. These observations have led to the hypothesis that shocks to equity market liquidity are an independent source of the business cycle. In this paper I construct a tractable model to evaluate this hypothesis. After calibrating the model to the US data, I find that a negative liquidity shock in the equity market can generate large reduct...

We study economies where some assets play an essential role to …nance consumption opportunities but payment arrangements are subject to a moral hazard problem. Agents can produce fraudulent assets at a positive cost, which generates an endogenous upper bound on the quantity of assets that can be exchanged for goods and services. This endogenous liquidity constraint depends on the characteristic...

We develop a dynamic model of liquidity provision, in which hedgers can trade multiple risky assets with arbitrageurs. We compute the equilibrium in closed form when arbitrageurs’ utility over consumption is logarithmic or risk-neutral with a non-negativity constraint. Liquidity is increasing in arbitrageur wealth, while asset volatilities, correlations, and expected returns are hump-shaped. Li...