Asset classes
This paper proposes a theory of endogenous differences in liquidity of assets based on the interaction between differences in the risk of assets and differences in liquidity needs of investors. An equilibrium of the model, which always exists and is unique, displays a class structure, where investor...
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| Format: | text |
| Language: | English |
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Institutional Knowledge at Singapore Management University
2021
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| Online Access: | https://ink.library.smu.edu.sg/soe_research/2291 https://ink.library.smu.edu.sg/context/soe_research/article/3290/viewcontent/Asset_Classes_av.pdf |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | This paper proposes a theory of endogenous differences in liquidity of assets based on the interaction between differences in the risk of assets and differences in liquidity needs of investors. An equilibrium of the model, which always exists and is unique, displays a class structure, where investors’ types sort themselves across different types of assets. I also provide a detailed analysis of the possible types of sorting and of the consequences for the cross-sectional properties of asset prices and their velocity. The framework can also be useful to think about what constitute a ""light-to-liquidity" and a "safe asset". |
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