Asset liquidity and international portfolio choice

Geromichalos, Athanasios; Simonovska, Ina

doi:10.1016/j.jet.2014.01.004

Cited by 30 publications

(18 citation statements)

References 34 publications

(36 reference statements)

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“…Some recent papers exploit the idea that assets prices can carry liquidity premia and offer a new perspective for looking at long‐standing asset‐related puzzles, see for example, Lagos () (equity premium puzzle) and Geromichalos and Simonovska () (asset home bias puzzle). In these papers, assets serve as media of exchange, an assumption which might be subject to criticism as, typically, we do not observe agents trade assets directly for goods.…”

Section: Related Literaturementioning

confidence: 99%

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

Geromichalos¹,

Herrenbrueck²

2016

Journal of Money, Credit and Banking

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109

101

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We revisit a traditional topic in monetary economics: the relationship between asset prices and monetary policy. We study a model in which money helps facilitate trade in decentralized markets, as in Lagos andWright (2005), and real assets are traded in an over-the-counter (OTC) market, as in Duffie, Gˆarleanu, and Pedersen (2005). Agents wish to hold liquid portfolios, but liquidity comes at a cost: inflation. The OTC market serves as a secondary asset market, in which agents can rebalance their positions depending on their liquidity needs. Hence, a contribution of our paper is to provide a micro-founded explanation of the assumption that different investors have different valuations for the same asset, which is the key for generating gains from trade in the Duffie et al framework. In equilibrium, assets can be priced higher than their fundamental value because they help agents avoid the inflation tax. Terms of use: Documents in Department of EconomicsOne Shields Avenue Davis, CA 95616 (530)752-0741 http://www.econ.ucdavis.edu/working_search.cfm Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets Athanasios GeromichalosUniversity of California -Davis Lucas Herrenbrueck University of California -DavisThis Version: September 2012 PRELIMINARY AND INCOMPLETE -PLEASE DO NOT CIRCULATE ABSTRACT ------------------------------------We revisit a traditional topic in monetary economics: the relationship between asset prices and monetary policy. We study a model in which money helps facilitate trade in decentralized markets, as in Lagos and Wright (2005), and real assets are traded in an over-the-counter (OTC) market, as in Duffie, Gârleanu, and Pedersen (2005). Agents wish to hold liquid portfolios, but liquidity comes at a cost: inflation. The OTC market serves as a secondary asset market, in which agents can rebalance their positions depending on their liquidity needs. Hence, a contribution of our paper is to provide a micro-founded explanation of the assumption that different investors have different valuations for the same asset, which is the key for generating gains from trade in the Duffie et al framework. In equilibrium, assets can be priced higher than their fundamental value because they help agents avoid the inflation tax.Keywords: monetary-search models, liquidity, asset prices, over-the-counter markets Email: ageromich@ucdavis.edu, herrenbrueck@ucdavis.edu.We are grateful to Jonathan Chiu, Miguel Molico, Guillaume Rocheteau, Christo...

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Section: Related Literaturementioning

confidence: 99%

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

Geromichalos¹,

Herrenbrueck²

2016

Journal of Money, Credit and Banking

Self Cite

109

101

View full text Add to dashboard Cite

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“…Lagos (2010) proposes a framework enriched with aggregate dividend shocks to resolve the equity premium puzzle. Geromichalos and Simonovska (2014) also bring the monetary search literature closer to questions related to international portfolio diversification. Similarly to the present study, they consider a two-country environment characterized by assets' role as media of exchange, which plays a crucial role in rationalizing the home asset bias puzzle.…”

Section: Related Literaturementioning

confidence: 97%

“…First, in the FIM, a random match between H and F is assumed with a matching function, M (B, S), which indicates the total number of matches in the FIM when the masses of buyers and sellers equal B and S, 12 We do not intend to offer a theory as to why only local assets are accepted as a means of payment. In this regard, we suggest seeing Geromichalos and Simonovska (2014) who show that local assets can indeed endogenously arise as a superior medium of exchange in local markets with an introduction of tiny transaction costs associated with local trade using foreign assets. 13 For simplicity, it is assumed that c(l) = l, which is of no importance for our main implications.…”

mentioning

confidence: 95%

International Reserves for Emerging Economies: A Liquidity Approach

Jung

Pyun

2016

SSRN Journal

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“…Since the mechanism presented in the paper does not hinge on this assumption, we make this modeling choice in order to keep the model tractable. Geromichalos and Simonovska (2014) and Zhang (2014) model the choice of an asset portfolio.…”

Section: Environmentmentioning

confidence: 99%

Monetary Union with a Single Currency and Imperfect Credit Market Integration

2015

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This paper shows that currency arrangements impact on credit available through default incentives. To this end we build a symmetric two-country model with money and imperfect credit market integration. With the Euro Area context in mind, we capture differences in credit market integration by variations in the cost for banks to grant credit for cross-border purchases. We show that for a high enough level of this cost, currency integration may magnify default incentives, leading to more stringent credit rationing and lower welfare than in a regime of two currencies. The integration of credit markets restores the optimality of the currency union. Abstract This paper shows that currency arrangements impact on credit available through default incentives. To this end we build a symmetric two-country model with money and imperfect credit market integration. With the Euro Area context in mind, we capture differences in credit market integration by variations in the cost for banks to grant credit for cross-border purchases. We show that for a high enough level of this cost, currency integration may magnify default incentives, leading to more stringent credit rationing and lower welfare than in a regime of two currencies. The integration of credit markets restores the optimality of the currency union. JEL

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Asset liquidity and international portfolio choice

Cited by 30 publications

References 34 publications

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

International Reserves for Emerging Economies: A Liquidity Approach

Monetary Union with a Single Currency and Imperfect Credit Market Integration

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