Liquidity and Economic Fluctuations

Local Business Cycles and Local Liquidity

“…Other features of local capital markets that can amplify the effect of local economic conditions on local liquidity are tighter local funding constraints and greater opacity in local information environments. This conjecture is based on theoretical models and empirical evidence demonstrating that liquidity should be lower when investors face tighter funding constraints or more opaque information environments (e.g., Gromb and Vayanos (2002), Eisfeldt (2004), Anshuman and Viswanathan (2005), Taddei (2007), Garleanu and Pedersen (2007), Brunnermeier and Pedersen (2009), and Hameed, Kang, and Viswanathan (2010)).…”

“…This conjecture is also supported by other theories showing that firm opacity can result in procyclical liquidity (e.g.,Eisfeldt (2004),Taddei (2007)). …”

A Detrimental Feedback Loop: Deleveraging and Adverse Selection

“…While Kurlat (2009) focuses on the relationship between liquidity and macroeconomic fluctuations as well as the amplification of shocks through learning, Bigio (2011) adds a labor market friction and analyzes how dispersion shocks to capital quality affect the liquidity of assets and the macroeconomy. Taddei (2010) rationalizes the positive relationship between aggregate economic activity and the cross-firm divergence of bond yields. Their models contrast with mine in that they abstract from the role of a liquid asset that co-exists with illiquid assets prone to adverse selection problems, which is a key ingredient of the mechanism presented in this paper.…”

“…There are several related papers that examine adverse selection problems in macro models following the partial equilibrium model of Eisfeldt (2004), such as Kurlat (2009), Bigio (2011) and Taddei (2010). Kurlat and Bigio both extend the framework of Kiyotaki and Moore (2012) by introducing endogenous resaleability through asymmetric information.…”

Is the relationship between macroeconomy and stock market liquidity mutually reinforcing? Evidence from an emerging market

“…4 Empirical studies have examined the role of macroeconomic forces in explaining stock market liquidity with new theoretical foundations. These studies suggest that stock liquidity is either influenced by business cycles (Taddei, 2007;Eisfeldt, 2004;Naes et al, 2011), mutual fund flow (i.e., Massa, 2004), funding liquidity (i.e., Brunnermeier and Pedersen, 2009) and monetary policy (i.e., Fernández-Amador et al, 2013).…”