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| Author: | Johnson, T.C. |
| Title: | Liquid capital and market liquidity |
| Journal: | Economic Journal
2009 : OCT, VOL. 119:540 p. 1374-1404 |
| Index terms: | financial markets assets technology portfolio management prices |
| Language: | eng |
| Abstract: | This paper explores how the supply of liquid capital affects the liquidity of asset markets. The paper views the former notion as a technological property of real investments and the latter as an endogenous property of financial market equilibrium, and describes a channel by which the two are linked. When agents hold more wealth in technologically liquid investments, a marginal adjustment to portfolio holdings alters discount rates less, causing a smaller price effect. Hence, even without intermediaries or frictions, the stock of transformable capital might be a central determinant of the resilience of financial markets. |
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