Liquidity sentiments

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• dc.contributor.author Asriyan, Vladimir
• dc.contributor.author Fuchs, William
• dc.contributor.author Green, Brett
• dc.date.accessioned 2019-11-20T08:45:55Z
• dc.date.available 2019-11-20T08:45:55Z
• dc.date.issued 2019
• dc.description.abstract We develop a rational theory of liquidity sentiments in which the market outcome in any given period depends on agents' expectations about market conditions in future periods. Our theory is based on the interaction between adverse selection and resale considerations giving rise to an intertemporal coordination problem that yields multiple self-fulfilling equilibria. We construct "sentiment" equilibria in which sunspots generate fluctuations in prices, volume, and welfare, all of which are positively correlated. The intertemporal nature of the coordination problem disciplines the set of possible sentiment dynamics. In particular, sentiments must be sufficiently persistent and transitions must be stochastic. We consider an extension with production in which asset quality is endogenously determined and provide conditions under which sentiments are a necessary feature of any equilibrium. A testable implication is that assets produced in good times are of lower average quality than those produced in bad times.
• dc.description.sponsorship Asriyan acknowledges financial support from the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563). Fuchs gratefully acknowledges support from the ERC grant 681575.
• dc.format.mimetype application/pdf
• dc.identifier.citation Asriyan V, Fuchs W, Green B. Liquidity sentiments. Am Econ Rev. 2019 Nov;109(11):3813-48. DOI: 10.1257/aer.20180998
• dc.identifier.doi http://dx.doi.org/10.1257/aer.20180998
• dc.identifier.issn 0002-8282
• dc.identifier.uri http://hdl.handle.net/10230/42902
• dc.language.iso eng
• dc.publisher American Economic Association
• dc.relation.ispartof The American economic review. 2019 Nov;109(11):3813-48
• dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/681575
• dc.relation.projectID info:eu-repo/grantAgreement/ES/1PE/SEV2015-0563
• dc.rights © American Economic Association. Can be found at https://www.aeaweb.org/articles?id=10.1257/aer.20180998
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.subject.keyword Sentiment
• dc.subject.keyword Liquidity
• dc.subject.keyword Asset prices
• dc.subject.keyword Capital reallocation
• dc.subject.keyword Business cycles
• dc.title Liquidity sentiments
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/publishedVersion