Presidential Address: Liquidity and Price Discovery
- Abstract
- Full Text PDF
- Author(s): Maureen O'Hara
- Published: Jul 15, 2003
- Pages: 1335-1354
- DOI: 10.1111/1540-6261.00569
Abstract
This paper examines the implications of market microstructure for asset pricing. I argue that asset pricing ignores the central fact that asset prices evolve in markets. Markets provide liquidity and price discovery, and I argue that asset pricing models need to be recast in broader terms to incorporate the transactions costs of liquidity and the risks of price discovery. I argue that symmetric information‐based asset pricing models do not work because they assume that the underlying problems of liquidity and price discovery have been solved. I develop an asymmetric information asset pricing model that incorporates these effects.