Paper #1583

Títol:

Liquidity sentiments

Autors:

Vladimir Asriyan, William Fuchs i Brett Green

Data:

Octubre 2017

Resum:

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 fl uctuations 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 of the model is that assets produced in good times are of lower average quality than those produced in bad times. We discuss the predictions of our theory within the context of several applications.

Paraules clau:

Sentiment, adverse selection, liquidity, capital reallocation, bubbles

Codis JEL:

D82, E32, G12

Àrea de Recerca:

Macroeconomia i Economia Internacional

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