Konferenzbeitrag

Liquidity Risk, Speculative Trade, and the Optimal Latency of Financial Markets

Garbade and Silber (1979) demonstrate that an asset will be liquid if it has (1) low price volatility and (2) a large number of public investors who trade it. Although these results match nicely with common notions of liquidity, one key element is missing: liquidity also depends on (3) an asset s correlation with other securities. For example, if an illiquid asset is highly correlated with a liquid asset, then speculators will naturally step in and make it liquid . In this paper, we update Garbade and Silber s model to include an infinitely liquid market security. We show that when the market security is added, the liquidity of the non-market asset is still a decreasing function of volatility and an increasing function of investor participation, but it is now also an increasing function of its correlation with the market. Furthermore, we show that at a critical correlation value of 0.86, it is optimal for the asset to continuously clear, i.e., for orders to transact immediately when placed in the market. This low-latency result holds regardless of the other properties of the asset. The updated model can help answer several questions relevant to current financial markets: How and why do short-term speculators provide liquidity in markets? , How much benefit do these speculators add? , and Can extremely low-latency in markets be beneficial?

Sprache
Englisch

Erschienen in
Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2014: Evidenzbasierte Wirtschaftspolitik - Session: Asset Pricing and Liquidity ; No. A19-V4

Klassifikation
Wirtschaft
Information and Market Efficiency; Event Studies; Insider Trading
General Financial Markets: General (includes Measurement and Data)
Portfolio Choice; Investment Decisions

Ereignis
Geistige Schöpfung
(wer)
Fricke, Daniel
Gerig, Austin
Ereignis
Veröffentlichung
(wer)
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
(wo)
Kiel und Hamburg
(wann)
2014

Handle
Letzte Aktualisierung
10.03.2025, 11:44 MEZ

Datenpartner

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ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Konferenzbeitrag

Beteiligte

  • Fricke, Daniel
  • Gerig, Austin
  • ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft

Entstanden

  • 2014

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