nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒10‒10
two papers chosen by
Thanos Verousis

  1. Liquidity and Investment in General Equilibrium By Nicolas Caramp; Julian Kozlowski; Keisuke Teeple
  2. Information Aggregation with Heterogeneous Traders By Cary Deck; Tae In Jun; Laura Razzolini; Tavoy Reid

  1. By: Nicolas Caramp; Julian Kozlowski; Keisuke Teeple
    Abstract: This paper studies the implications of trading frictions in financial markets for firms' investment and dividend choices and their aggregate consequences. When equity shares trade in frictional asset markets, the firm's problem is time-inconsistent, and it is as if it faces quasi-hyperbolic discounting. The transmission of trading frictions to the real economy crucially depends on the firms' ability to commit. In a calibrated economy without commitment, larger trading frictions imply lower capital and production. In contrast, if firms can commit, trading frictions affect asset prices but have no effect on capital and production. Our findings rationalize several empirical regularities on liquidity and investment.
    Keywords: liquiditiy; investment; Present bias
    JEL: E44 G32 G12
    Date: 2022–09–14
  2. By: Cary Deck (Department of Economics, Finance and Legal Studies, University of Alabama and Economic Science Institute, Chapman University); Tae In Jun (Department of Economics, Finance and Legal Studies, University of Alabama); Laura Razzolini (Department of Economics, Finance and Legal Studies, University of Alabama); Tavoy Reid (Department of Economics, Finance and Legal Studies, University of Alabama)
    Abstract: The efficient market hypothesis predicts that asset prices reflect all available information. A seminal experiment reported that contingent claim markets could yield market outcomes consistent with information aggregation when traders hold heterogeneous state-contingent values. However, a recent experiment found the rational expectation model outperformed the prior information and maxi-min models in contingent claim markets when traders hold homogeneous values despite the no trade equilibrium in that setting. But that same study failed to replicate the original result calling into question when, if ever, prices reliably reflect the aggregate information of traders with heterogeneous values. In this paper, we show contingent claim markets can robustly yield prices consistent with the efficient market hypothesis when traders hold heterogeneous values in certain circumstances. The key distinction between our environment and that of the previous studies is that we consider trader values that are correlated and not too dissimilar.
    Keywords: Information Aggregation, Rational Expectations, Laboratory Experiments
    JEL: C9 D8 G1
    Date: 2022

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